Why the inflation rate isn’t as bad as you think

Inflation is a hot-button issue, and its political fallout can be huge. Some think that the hyperinflation during Germany’s Weimar Republic in the 1920s — when, at a trillion to the dollar, the German mark literally was not worth the paper it was printed on — contributed to the rise of Adolf Hitler. Current U.S. inflation is not remotely comparable, but pollsters say it helped to sway voters in the midterm elections in favor of the Republicans.

We hear that inflation is “soaring” not only on Fox News but also in the pages of the New York Times. We are told that the inflation rate has remained “stubbornly high” at 8.2% over the past 12 months.


Yet the inflation rate in recent months tells a very different story. From the beginning of July to the end of September, prices rose by only 0.5% — equivalent to an annual rate of about 2%.

Why the difference in numbers? Imagine that you’ve been speeding down the highway at 75 miles per hour for 45 minutes, then you turn onto congested city streets and have been averaging 15 mph for the last 15 minutes. How fast are you driving now? The common-sense answer is that you’re doing 15 mph. But measured over the last hour, you’re doing 60.

The arithmetic of 12-month inflation rates is more stubborn than inflation has been. Even after slowing down, it takes time for your speed over the last hour to come down, too. But it makes no more sense to claim that inflation is “soaring” now than it would to say that you are accelerating through stop-and-go traffic.

The 12-month inflation rate is a useful measure for some purposes, like comparing trends across countries or over long time periods. What doesn’t make sense is to use the 12-month rate to claim that the current level of inflation is either rising or falling.

The causes of this year’s inflation are a legitimate matter for debate. Supply-chain disruptions due to the COVID-19 pandemic, exacerbated by the war in Ukraine, have played a role worldwide. The power of mega-corporations to raise not only their prices but also their profit margins, now at their highest level in 70 years, added fuel to the fire.

Stimulus spending under the Biden administration has raised inflation, too, though an extra bump in prices may have been worthwhile to support hard-pressed families, rebuild our decrepit infrastructure, and possibly head off a depression.

The reasons that inflation has cooled off in recent months are also open to debate.

The Biden administration’s decision to tap the Strategic Petroleum Reserve had an impact: Gasoline prices fell more than 20% from the beginning of July to the end of September. Interest rate hikes by the Fed began to dampen demand — which, although not the ideal fix for supply shortages, is the main inflation-fighting tool the Fed has at its disposal, recalling the old adage about every problem looking like a nail when the only tool you’ve got is a hammer.

But whatever the causes, we ought to be able to get the facts straight.

And the fact is that rather than soaring, inflation has actually eased — and eased a lot — in recent months. Fevered reports of runaway inflation are misleading, with political repercussions that could go well beyond number games.

James K. Boyce is a senior fellow at the Political Economy Research Institute, University of Massachusetts Amherst.

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