Moreover, the inflation of 2021 and 2022 has stemmed in part from the Covid-19 pandemic and the war in Ukraine, and you can’t really blame economists for the inadequacies of epidemiologists and geopolitical analysts. What’s less forgivable was economists’ initial eagerness to write off many of these developments as “special factors” that would soon dissipate on their own, failing to recognize soon enough that inflation was spreading and becoming embedded.
Undoubtedly, there was much to like in Wednesday’s report beyond just the the effects of falling energy prices: The underlying price pressures from both core goods and services eased in July, and there are reasons to expect that more good news may be in store. Fewer small businesses are reporting plans to raise prices, and manufacturers are paying lower prices for their inputs. On the other hand, wages remain well above the level that would be consistent with the Fed’s long-run inflation goals. And the big question remains: Is this the end of the inflationary scare altogether, or is it just the cresting of a single wave in a longer and harder to defeat inflationary regime like the period from the late 1960s to early 1980s, marked by several peaks and troughs?
It’s hard to say with much certainty because the experts have been so consistently off the mark, including the Fed itself. Policy makers risk doing too little and allowing inflation to fester or doing too much and unnecessarily causing a recession. That lingering uncertainty makes it difficult for the Fed to adjust rates precisely to cool the economy without sending it into a recession. A soft landing for the economy certainly looks more likely today than it did yesterday, but it would be a lot more so if businesses and policy makers had some visibility as to the foggy runway ahead.
Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company's Miami bureau chief. He is a CFA charterholder.