Paul Krugman says January inflation likely rose

Paul Krugman says January inflation likely rose

Analysts are warning that the next monthly consumer price index report, due on Tuesday, could show US inflation rising for the first time after six months of consecutive declines. But one of the country’s top economists warns against doing too much.

Inflation in January likely rose 0.4% from December, while core inflation, which excludes volatile food and energy products, could also rise 0.4%, according to a Reuters survey of economists last week. Rising gasoline costs and economy-wide price stickiness are partly responsible for the persistence of inflation in the United States and will likely reinforce the Federal Reserve’s view that the fight against rising prices far from over.

A hot inflation report this week could leave markets nervous about whether the Fed will stay the course with lower interest rate hikes or opt for more aggressive action to cool the economy. But Tuesday’s numbers may not tell the whole story about inflation, according to Nobel Prize-winning economist Paul Krugman.

In a Tweeter On Sunday, Krugman predicted “a slight uptick” in inflation, but added that Tuesday’s report is likely to lack enough data to accurately predict the future path of inflation. While the report will likely show prices rising, Krugman wrote, it will be “for reasons that tell us little about how we are actually doing on inflation.”

Where does inflation go from here

Predicting the path of inflation is a risky game that has tripped up many economists in recent years. Krugman himself has admitted make mistakes in 2021, when he and other economists predicted inflation would be an ephemeral factor in the US economy that would fade soon enough.

But while some economists have warned that surging inflation last year will require a severe recession and a sharp rise in unemployment to correct, Krugman remained optimistic on the Fed’s chances of staging a soft landing and avoiding a deep recession, forecasts that have so far been validated by the economy relative health This year.

The road to inflation control is long, however, despite recent positive news, and bumps along it are almost inevitable. “The disinflationary process, the process of reducing inflation, has begun,” Fed Chairman Jerome Powell said. said last week, but added: “There is still a long way to go. These are the very first steps.

The expected rise in inflation this month will come down to higher prices for some items after months of declines, which may have been temporary. Krugman pointed out a recent reversal used car prices, which rose 2.5% between December and January after falling 15% in 2022. Gasoline prices have also risen about 4% since last month, ending month of decline since prices peaked last year when the war in Ukraine rocked energy markets.

All of this indicates that the temporary factors that have kept inflation low in recent months are fading, Krugman wrote, driving prices higher. But that doesn’t necessarily mean inflation is set to soar. another 40 year high as was the case last summer.

Housing costs per one, which the Bureau of Labor Statistics uses to measure housing prices, can be misleading on paper. Housing costs in the United States have dropped significantly in recent months after soaring in 2021 and early 2022, but official housing costs that factor in inflation calculations are expected stay high for the next few months, as house price measures tend to the train real market costs.

Ahead of this week’s report, analysts said that while inflation is expected to rise, that doesn’t mean the fight against rising prices has been lost. While housing prices and a tight labor market will continue to apply upward pressure on inflation, “beneath the surface, many of the cyclical subcomponents that drive the CPI appear to be heading in the right direction,” said Jason Pride, chief investment officer of private wealth. at Glenmede. Fortune.

A recent adjustment The frequency with which the BLS assesses price changes in different years may also lead to higher-than-expected inflation this week, but that doesn’t mean the Fed’s plan to reduce inflation has been tainted.

“Underlying inflation is expected to rise again in January as core goods deflation pauses and methodological changes boost the housing component,” analysts said. Morgan Stanley wrote in a note last week. “Updated pegged weights could inject additional volatility, but we see the path to disinflation intact beyond January.”

A slight rise in prices last month would show that the road to getting inflation back to manageable levels is long and uneven, but overall things are still going as planned, Morgan Stanley analysts wrote.

“My baseline view is that the economy is likely still unsustainable and inflation is down substantially but likely above target,” Krugman wrote.

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