Why Inflation Is Headed Lower

Where we do some fancy advanced math and come up with some kinda-sorta good news


Government inflation numbers are backward-looking. This summer's big jump in inflation between May and July was the result of an oil spike that has already reversed. So, what if we assume energy prices had held firm instead of surging? Jim Hamilton over at Econbrowser does the math so I don't have to:

...if energy prices had held constant between May and July but all other price increases had been the same, the year-over-year CPI number would have been more like 4-1/2% rather than 5-1/2%. But does it make any sense to ask, What if energy prices hadn't gone up between May and July? There are certainly good reasons why the Fed should not be taking as much comfort in "core inflation" as it has in recent years. But in this case, there is a clear need to net out the May-to-July energy price increase—it's already been reversed. The US national average gas price is back to $3.78/gallon, right where it was in mid-May. Thus, even without any further drop in the price of gasoline—and personally, I do expect further drops—the 4-1/2% number is a better summary of where we stand right at the moment than 5-1/2%. So no, I don't think that yesterday's CPI numbers will cause the Fed to panic. Because yesterday's news is already way of out of date.