Inflation is the story that everybody keeps missing. In 2020, many people didn’t expect inflation to rise. Wrong. In 2021, many expected inflation to be brief or “transitory.” Wrong. Last month, many expected inflation to peak. Wrong. In May, inflation reached its highest level in more than four decades. But there’s a bigger story to tell here. What are the subtler inflation numbers telling us about the future of the economy? And is the media being too pessimistic about the economy given how strong the labor market has been coming out of the pandemic? To answer those questions, Derek welcomes Justin Wolfers, a professor of public policy and economics at the University of Michigan. As you’ll hear, Wolfers is brilliant, straightforward, and incredibly un-shy about telling Derek when he thinks he’s full of it. If you think Derek is full of it, or if you would like to drop a more complimentary line, send your notes, questions, and curiosities to PlainEnglish@spotify.com
In this excerpt, Wolfers discusses core inflation and why gas prices aren’t a great indicator for where prices might be heading.
Derek Thompson: So, what I want to know for starters is how a professional economist processes an inflation report like this. So it’s 8:30 a.m. Eastern Standard Time on a Friday, you go to the Bureau of Labor Statistics website, that is bls.gov, you click on this report, what do you look at? What jumps out at you?
Justin Wolfers: One thing that’ll actually help you get a bit of context to that is first of all, you do a bit of thinking before you get there and you think, “What is it I expect to see?” And also have a look at what the professional forecasters in financial markets think that they’re going to see. But my eyes immediately are drawn to what’s called core inflation. That’s the overall inflation level, but you strip out or remove the effects of gas and food. A lot of people don’t like that because the truth is, we all buy gas and food.
Thompson: Right. Gas and food are actually pretty core to people’s lives, but it’s called core inflation because gas and food tend to be very bouncy in terms of prices and other prices tend to be a little bit more stable in terms of their growth. Is that right?
Wolfers: Exactly. So partly it’s bouncy and partly they bounce for non-fundamental reasons. So energy prices are up a lot more because of Putin than because of the economy. Food prices can rise and fall because of the weather rather than the economy. So it’s a little bit like looking for the signal amidst the noise. And if we want to know what’s going to happen in the future, you care about the underlying rate of price change, and that’s what core inflation tells you.
So you never get the dramatic headlines out of core inflation. Today’s dramatic headline was, “Inflation’s 8.6 percent, 40-year high, sky is falling.” The core rate says, “Well, we’re in a kind of one-off moment with Putin right now and everything happening there. So, strip that out and we see a rate of 6 percent,” which is certainly high enough to be troubling.
Thompson: And when you look at the other numbers—I should say, I’m not going to try to lead you down a catastrophic trail here, but a lot of the other numbers are pretty high. You have groceries up 11.9 percent. That’s the biggest increase since 1979. Now, groceries include food and food is not a part of core inflation. Airfare is up 37.8 percent. That’s the largest since 1980. Restaurants are up 9 percent. That’s the largest ever. And then fuel oil, which again is not part of core inflation, but people care about it and oil prices are printed in size 1,000 font all over the country, those are up 107 percent. That is the largest rate ever. So there are a lot of really, really high numbers here. What is the deep story of this inflation print? If I’m a freshman in your Econ Current Affairs 101 class, I raise my hand, “Professor, why is this happening?” Disentangle the deep story here.
Wolfers: I’m going to go back to what you just did and I’m going to teasingly call that the Fox News report.
Thompson: Let’s do it.
Wolfers: Because if what you want to know is, what’s going on with the overall price level in people’s cost of living? That’s the headline inflation number. If what you want to know is, where’s inflation going? Look at core inflation. Is there any reason to look beneath the surface? An initial answer is, for most of the questions you care about, which is what’s happening to the overall price level and its future, there’s no reason. And so I jokingly called your intro there the Fox News approach, because what you did, you said, “Well, inflation’s 8 percent, but look at all these other prices that are higher.” Well, the thing is, with any average, some things are higher and some things are lower and we usually think you should look at the average. So let’s not play that game.
Now it is relevant if you’re thinking about things like politics. So we’re in a particularly unlucky moment right now, which is the most politically salient prices are gas and grocery stores, right? So we take them out of core inflation because we think they’re uninformative about the future, but they’re incredibly informative about the real cost-of-living pressures facing families and also how they perceive them. Because you see your gas bill, you fill up all the time. Whereas paying for things like education, it’s actually much more expensive, a much bigger part of a family’s budget, but you don’t see those bills anywhere near as frequently. So we’re actually at a bad moment where the headlines look even worse than the reality, which is already bad.
This excerpt was lightly edited for clarity.
Host: Derek Thompson
Guest: Justin Wolfers
Producer: Devon Manze
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