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The Biggest Economic Question of the Moment: Is This Peak Inflation?

Noah Smith joins to discuss why retail and oil prices are falling and what it means for the U.S. economy


The question everybody’s asking on cable news right now is whether we’re in a recession. I think there’s an even more important question to ask: Are we at peak inflation? If inflation U-turns, it means the Fed won’t have to keep jacking up interest rates, won’t have to keep destroying demand, and won’t have to indefinitely pump the U.S. economy with tranquilizing drugs to break the fever.

I believe peak inflation is right here, right now. In retail, Target and Gap are slashing prices on inventory. In the car market, used car sales are falling. In electronics, microchip shortage looks like it’s easing. In international shipping, freight rates across the Pacific are declining. And most importantly, the price of oil, metals, wheat, and corn are all falling. Oil prices are falling really, really fast—and that tends to mean that gas prices will follow. Today’s guest is Noah Smith, the economic writer and author of the newsletter Noahpinion. We talk about the great disinflation, where it’s happening, why it’s happening, what it means for the future of the U.S. economy and politics. This episode was in high demand in our mailbox. And as always, keep it coming. Send your feedback and episode ideas to

Derek and Noah discuss whether the U.S. economy is in a recession right now and historical downturn comparisons, before taking a look at inflation and oil prices.

Derek Thompson: Do you think the U.S. economy is in a recession right now, and why?

Noah Smith: Well, so the word recession isn’t well defined. The popular definition is two successive quarters of negative GDP growth. But I think that there are times when that criteria does not make a lot of sense, and this might be one of them. So when economists talk about recessions, they just mean any deviation below trend in output. And in terms of that, I think yes. We’re going to definitely see a deviation below trend in terms of output. But I think that ... You see employment holding up very well and that means people don’t feel like there is a recession. You see consumption and capital expenditures holding up very well. So it doesn’t feel like a recession to a lot of people yet. And yet I think we do have evidence that declines in aggregate demand are now at work, thanks to the Fed and thanks possibly to some other factors.

Thompson: So even if it’s not something like the 2020 recession or the 2008 recession, it could still be the kind of downturn that we saw maybe at the beginning of the century in 2000-01, where consumer demand was pretty strong, unemployment didn’t increase too much, but at the same time you saw a pullback in investment, you saw trouble with inventories, you saw trouble with exports, and so technically the U.S. economy entered a bit of a recession that year, but it wasn’t the kind of catastrophe we’ve experienced in the last two official downturns.

Smith: Exactly. And if I had to make a prediction—of course predictions are worth the paper they aren’t printed on—I would predict that 2001 recession is the closest analog for what we’re about to experience.

Thompson: Which tells me that one of the more important questions here is not just are we in a recession or are we not in a recession, but rather what’s going on with inflation? Because inflation is really, really persistent. And the Federal Reserve has to destroy a ton of aggregate demand in order to stabilize prices. Then, maybe we could see a more significant crash. Maybe equities could continue to fall. The housing market could continue to fall. But if inflation is already starting to turn now, that seems really important in terms of charting the near future of the Fed. So I’d like to just move into talking about disinflation. Right now, you look across markets, you’re seeing just signs galore that prices are already coming down in wheat, natural gas, lumber, corn, Rolex watches, Bored Apes and maybe most importantly in oil. So I want to go through a couple of these categories and have you telling me what’s going on with these prices. What’s going on with oil prices right now?

Smith: I mean, they’re going down. Oil prices are determined by supply and demand. In response to higher oil prices, we have seen an expansion of capacity. The United States has increased oil production by [almost] a million barrels a day relative to last year. OPEC has increased oil production somewhat and maybe running out of spare capacity to increase more. And so we’ve seen that Russian capacity—Russia was the big decrease, right? Russian capacity really crashed, after the Ukraine war began and sanctions initially hit. Russia has now worked out deals to reroute the oil it used to sell to Europe, to India and China. And everyone expected this because oil’s very fungible. You can just pump it onto a ship, pump it into a tank, sail it across the ocean wherever you want, very cheaply. And so it was always pretty certain that Russia was going to just, instead of selling oil to Germany, it was going to sell oil to China and India.

And that is exactly what is happening. But what happens is that those people start buying super-cheap Russian oil and they say, “Saudis, we don’t need your oil. Nigeria, Venezuela, whoever else we’re buying from, we don’t need your oil. We’ll just buy cheap stuff from the sort of captive Russian suppliers.” And so then, those people say, “Well, OK, who will buy our oil?” And then Europe and America are like, “OK, we’ll buy your oil.” And so then, the markets sort of stabilize. So that’s the supply side. On the demand side, you’ve seen Fed interest rate hikes. And so I think that people seeing the Fed raising rates, hiking rates, that’s going to reduce the demand for oil. So we’ve got a reduction demand … not an increase in supply, but at least a stabilization of supply, not a big decrease and I think that those two things are probably what’s pushing oil prices down.

This excerpt was lightly edited for clarity.

Host: Derek Thompson
Guest: Noah Smith
Producer: Devon Manze

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