Inflation is Coming Down—So What?

So what, indeed.

Shelter cost inflation slowed, to 0.4% in February from the previous month compared with a 0.6% pace in January. This reinforced suspicions that January’s high reading in that category was an anomaly. But apparel prices, a category that had been in deflation, jumped 0.6%.

There’s concern that inflation isn’t “slowing” enough to encourage the Federal Reserve to start cutting its benchmark interest rates, and that’s a two-edged sword.

It’s nice that inflation may finally be abating, but that’s for the future. Most of us live in the here and now; we have to deal with the present reality of the much higher prices for our necessities, much less for our wants, that Progressive-Democrat Joe Biden’s hugely inflationary policies have created. Those prices won’t come down in nominal terms, and they can’t come down in real terms until wages catch up with, and surpass, prices—which means that wage increases must surpass those price increases over a period of time.

That isn’t occurring at a rate that would ease the loss us Americans are experiencing in the grocery stores and in the homes we want to buy. That last, driven in large part by high interest rates, also is inhibiting our heretofore geographical mobility, and that in turn hurts our ability to earn more by changing jobs. We’re functionally denied that avenue for wage increases that surpass price increases.

As things over the last three years or so, wage increases were much less than those inflation-driven price increases for a couple of years, until last summer. At that point, wages increased slightly—and only slightly—faster than price increases over each of the next several months. Over the last couple of months, though, that trend appears to have reversed, with wage increases again being smaller than price increases as inflation has begun, slowly so far, to rise again. Indeed, over the longer term into the past,

[a]ccording to ECI [the Bureau of Labor Statists’ Employment Cost Index], inflation-adjusted wages have shrunk by 3.7% since the end of 2020. While real wages rose in response to falling energy prices late last year, they have been roughly flat since. Worse, the drop in real wages erased all gains made in the late 2010s. Real wages today stand at 2015 levels, meaning Americans’ paychecks don’t go any further now than they did eight years ago.

That two-edged sword shows up in this way. Higher interest rates help the stereotypical widows and orphans—and today’s retirees—who are living with fixed income sources facilitating their Social Security payments. Those fixed income sources benefit from higher interest rates, since that interest is the source of income for the debt- and dividend-paying instruments they hold.

Higher interest rates, though, hurt the overall economy in a couple of ways. One is the higher cost of the Federal government’s borrowing, including its rolling over of its existing debt. That higher cost means less money to spend on things the Federal government should be spending on (setting aside, for this post, the definition of what the government should spend on). Those higher rates also increase the cost of money to businesses, which leads to lower investment rates, less R&D, slower pay raises, and reduced hiring.

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