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Paul Krugman
By Paul Krugman
Opinion Columnist
The economic news in 2023 was almost miraculously good. Not only did America’s economy defy widespread predictions of recession, it also defied claims that only a significant rise in unemployment could bring inflation under control. Instead, we got a combination of strong growth, unemployment near a 50-year low and plunging inflation.
But last week, the Bureau of Labor Statistics reported that both the Consumer Price Index and the Producer Price Index rose 0.3 percent in January, more than most analysts expected. And the usual suspects — inflation perma-bears, political enemies of the Biden administration and economists who wrongly predicted that disinflation would require mass unemployment — jumped on the data as if it were a fumbled football.
So, are the good times over?
No. Everything we know suggests that those disappointing numbers were mostly a statistical blip rather than marking a significant worsening in inflation trends.
Before I explain how such blips can happen, let me tell you what indicators I was looking at after the inflation reports.
First, I was looking at financial markets, where instruments like inflation swaps and index bonds tell you what inflation rates investors putting real money on the line expect. The pricing on these instruments is still pointing to low inflation, around 2 percent or a bit more.
Second, I was waiting to see what happened in the Atlanta Federal Reserve’s survey of business inflation expectations, which asks businesses how much they expect costs to rise over the next year. If inflation were suddenly surging, you’d expect businesses to notice. But their inflation expectations rose to 2.3 percent in February from … 2.2 percent in January.
But if nothing much has changed, where did those slightly scary B.L.S. numbers come from?
In principle, the government estimates overall consumer prices the same way the American Farm Bureau Federation estimates the price of a classic Thanksgiving dinner (which was, by the way, down 4.5 percent in 2023): it calculates the cost of buying a fixed basket of goods and services.
In practice, our economy is a lot more complicated than a standardized holiday dinner menu, and estimating inflation involves a lot of fancy statistical footwork. The B.L.S. is extremely competent and professional — in fact, one rarely heralded policy advantage the United States has over other countries is that we generally have better data. But while I have nothing but praise for the bureau, its reports can still sometimes be misleading, for several reasons.
One reason is that to make sense of monthly data, you need to adjust for seasonal factors. Some of these factors are obvious: fresh vegetables get more expensive in the winter, cheaper in the summer. Others are less obvious. Goldman Sachs, which correctly predicted a bump in official inflation, points out that there is a “January effect” on prices, because many companies raise their prices at the beginning of the year. And Goldman argued, in advance, that the official numbers wouldn’t be sufficiently adjusted to reflect this effect, leading to a spurious bump in measured inflation — a bump that will vanish in the months ahead.
Goldman also pointed out that the single largest component in the Consumer Price Index — 27 percent of the basket! — is a price nobody actually pays: owners’ equivalent rent, an estimate of what homeowners would be paying if they rented their houses. There are reasons the bureau measures housing costs this way, but there are also reasons to believe that in recent years that number has become misleading, distorting and exaggerating estimates of overall inflation. As it happens, the B.L.S. also produces an estimate of prices excluding owners’ equivalent rent, roughly matching the way European countries measure inflation. This “harmonized” index is up only 2.3 percent over the past year.
If you find all of this a bit mind-numbing, let me tell you a secret — so do I, even though this is supposed to be my field. But the bottom line is important: Despite some disappointing numbers last week, the basic narrative hasn’t changed. The U.S. economy continues to look like an amazing success story.
Saying this leads, of course, to pushback from Republicans who’ve claimed ad nauseam that Biden’s “socialist” policies would be a disaster — and as I recently wrote, for such people believing is seeing, so they continue to insist that the economy is terrible even when by all objective measures, it’s doing pretty well. You also get some pushback from people on the left, who apparently believe that a progressive president shouldn’t be allowed to tout policy successes until he has completely eliminated poverty and insecurity — that is, never.
The fact, however, is that Biden has put in place a very ambitious agenda — major enhancements of Obamacare, student debt relief, big infrastructure spending, large-scale promotion of semiconductors and green energy that have led to a surge in manufacturing investment. Many voices warned that he was overreaching, that the economy would pay a big price.
But it hasn’t. It turns out that we can, in fact, afford to do a lot to improve Americans’ lives and invest in the future.
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Paul Krugman has been an Opinion columnist since 2000 and is also a distinguished professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman
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