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**JULY 13, 2022**

Kuttner on TAP

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**** The Fed Is a One-Trick
Pony

And hiking interest rates when real wages lag far behind inflation is a
dirty trick.

Will the Federal Reserve needlessly push the economy into recession once
again? A sloppy reading of the topline in today's inflation data
for June will give
hawkish central bankers plenty of ammunition for another large hike in
interest rates.

But the 9.1 percent June annual rate of increase in the Consumer Price
Index misstates what's actually going on. Two of the main drivers of
inflation are energy and food. The gasoline price index rose 11.2
percent for June. But costs of both food and energy began decelerating
in the last week in June and the first two weeks in July-gas prices
are well down from their peak-and the June CPI report doesn't pick
up those declines.

Meanwhile, wage growth

continues to lag well behind price increases. According to the Bureau of
Labor Statistics, real (inflation-adjusted) weekly wages declined by 4.4
percent between June 2021 and June 2022. So wages are obviously not
driving inflation. As economist Dean Baker puts it, "It is impossible to
have a wage-price spiral when wage growth is slowing."

The real inflation story continues to be supply chain bottlenecks plus
price-gouging by industries with monopoly pricing power. Federal Reserve
policies can do little about either, and other policies of the Biden
administration are gradually improving both.

Last Friday's jobs report by the Bureau of Labor Statistics, which got
less attention than today's release on prices, is a better indicator
of what's really going on in the economy. The economy created 372,000
new jobs. Private-sector employment is now above pre-pandemic levels.

The annualized rate of nominal wage increases, at 4.3 percent, is less
than a percentage point above the 3.4 percent increase in 2019, when
there were no price pressures and inflation was well below the Fed's 2
percent target.

The unemployment rate stayed at 3.6 percent for the fourth consecutive
month. Basically, the recovery is doing just about what you'd want it
to do, and wage pressures are not responsible for price increases. But
the Fed seems determined to use rate hikes to induce a recession. As the
one dissenter from the interest rate policy of the Federal Open Market
Committee, Esther George of the Kansas City Fed Bank, put it in a recent
speech
,
"Such projections suggest to me that a rapid pace of rate increases
brings about the risk of tightening policy more quickly than the economy
and markets can adjust."

Fed policy has a bad and chronic habit of lagging reality. We must hope
that as price increases continue to decelerate, the Fed will come to its
senses before it inflicts further needless damage.

~ ROBERT KUTTNER

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