Unfortunately, the country’s bad mood probably isn’t because of economics even though they may think it is
A couple inflation points. First, prices of oil and a bunch of commodities have dropped recently. This is not because there has been a swift reshuffling of overall supply or demand. It’s not because more oil refineries came online or because a drivers stopped driving.
At least some of the declines are likely due to changes in speculative behavior. Maybe the Fed hiking hard has changed investor psychology. Maybe not. But either way, as welcome as lower gas prices may be, I’m wary about reading too much into the better numbers.
Russia’s war in Ukraine didn’t stop, it has fundamentally changed the global commodities map, and none of the governments opposed to Russia’s invasion have adjusted their trade regimes appropriately.
The Biden admin’s effort to arrange an allied price cap for Russian oil is a useful step if they can stick the landing, but it’s at best a stopgap measure. This war is not a disruption, it is a long-term rearrangement of basic resources.
The recent price declines are better than further price jumps, but wild volatility in commodity pricing is a problem no matter which direction the prices are going. Nobody can plan. Private investment to boost supply — the ideal fix for inflation — won’t happen.
Governments need to take stronger and more studied steps to stabilize the supply of essential commodities. In the U.S. that means a serious commitment to industrial policy, and a much broader slate of trade talks with its allies.
Until that happens, most good news on commodity inflation is probably temporary. The inflation issue with Russia isn’t the sanctions, it’s the war itself, and there is no interest rate policy that can make it go away.
More optimistically, as of May, household incomes were keeping pace with inflation. The typical U.S. household, despite the inflation, was doing the better than ever financially.
That tracks with the Fed’s survey of household economic well-being for 2021, which also registered best-ever results.
And more recently, car sales, including sales of gas guzzlers, are very strong. Could be a fluke, but it’s not what you’d expect to see if gas prices had become an insurmountable household burden.
In short: inflation isn’t really improving, but it’s also not as bad as the conventional wisdom would suggest. And there is a lot that countries can do through trade policy to keep further supply shocks from creating more trouble.
This is from the link above:
The typical U.S. household earned more than ever as of May—even after accounting for inflation. And their finances were secure, with consumer spending rising at a steady clip even as their saving rate remained elevated.
This is being obscured by the misfortunes of America’s investors, who are being hit by huge tax payments owed on capital gains from 2021, falling asset values so far this year, and ongoing weakness in cash distributions via interest and dividends.
The disconnect between the wellbeing of the vast majority and the discomfort of the few makes it challenging to interpret the aggregate data. But a close reading of the official numbers on income and spending implies that most Americans are doing far better than before the pandemic.
Inflation-Adjusted Spending Remains Largely on Track
Before the pandemic struck, Americans consumed about 2.5% more goods and services each year. The virus knocked things off course, and there was good reason to fear that the damage would be permanent, as is often the case. Remarkably, that’s not what happened this time. By March 2021, real consumer spending had largely returned to the pre-pandemic trend. Americans haven’t yet made up for the ~$1 trillion in spending that they missed out on, but they are doing far better than they did after the global financial crisis.
I continue to believe that this bad mood is really a bad case of collective PTSD from years of Trumpian chaos, the pandemic and the general sense that things are hurtling out of control — and nobody is able to stop it. In other words, I think this national funk is more psychological than economic and even though the latter is certainly affected by the former in many cases, the numbers don’t really bear it out. It’s in our heads.