Paul Krugman calls out commentators who blame everything on inflation as suffering from “inflation brain.”
Let me give you two recent examples of inflation brain in action.
This month, a preliminary release by the widely followed University of Michigan survey of consumers reported a significant fall in consumer sentiment. Consumers gave a number of reasons for reduced optimism, but every news article I saw about it attributed their pessimism to a jump in expected inflation, both over the next year and over the next five years.
Then the final version of the May report was released, and the initially reported jump in inflation expectations more or less disappeared. Consumer sentiment was still significantly down, but the survey’s news release attributed this decline largely to concerns about labor markets and interest rates, not inflation fears.
Another example: Target, Walmart and other big retail chains have recently announced a number of price cuts, both temporary and permanent. They are presumably doing this because they are seeing worrisome softness in demand. But many of the reports I saw managed to frame falling prices as somehow a symptom of inflation — simply assuming that inflation must be sapping consumers’ purchasing power, when the reality is that wages have consistently outpaced inflation since the summer of 2022. Maybe demand is weakening for other reasons?
In both cases, then, commentators seemed determined to frame everything — even falling prices! — as an inflation problem, while ignoring other possible concerns and risks.
And he worries that it’s infecting the Federal Reserve, noting that the European Central bank is planning to cut rates while it seems the Fed is still holding fast. He notes that inflation is coming down at a similar rate in both America and Europe (and goes into some arcane technical explanations as to why inflation is at this rate) and then speculates that the Fed is suffering from a touch of inflation brain:
Am I sure that the bump in inflation early this year was a statistical illusion? No, of course not. But the Fed has to steer between two risks, that of cutting rates too soon and feeding a reacceleration of inflation and that of waiting too long while the economy starts to crack under the stress of high rates — a possibility hinted at in consumer surveys and in those big-store price cuts, as well as indications of a softening job market. And I worry that the Fed is too focused on the first risk and not enough on the second — that it’s suffering from at least a mild case of inflation brain.
And at this point we have to talk about politics. If and when the Fed finally does cut, you know that it will be fiercely attacked by Donald Trump and his allies for conspiring to re-elect President Biden; after all, that’s what they wanted the Fed to do on their behalf before the last election. I don’t think that’s weighing on the Fed yet, but as the election approaches I fear that it will.
So let’s be clear: This would be a really bad time for the Fed to give in to political pressure from the right. It shouldn’t do so in any case, but especially not now, when it’s clear that any attempt to appease MAGA types would be futile. If Trump’s forces are victorious, the Fed (along with many other U.S. institutions) will quickly lose its independence; a former Trump aide, Peter Navarro, interviewed in prison, recently declared that if Trump wins, Jerome Powell, the Fed chair, will be gone within 100 days.
I understand that Fed officials can’t talk about these political considerations. But I hope they’re aware of them.
Vibes are a bad way for people to decide elections or for the Fed to decide interest rates. Succumbing to threats is even worse. But both of those things make up a huge part of our politics today. It’s not good.