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**AUGUST 12, 2022**
Kuttner on TAP
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**** It's Supply, Stupid
More evidence today's inflation is not the result of excessive demand
The latest inflation numbers, released Friday, showed a one-month drop
in prices. Inflation
hawks, like Jason Furman
,
insist that one good month doesn't reverse a trend, and urge the Fed
to impose yet another three-quarter-point rate increase at its next
meeting in September.
Higher-than-normal inflation is not over. But the slowing rate of
inflation rebuts the strongest argument of the hawks-that inflation is
becoming "embedded" in the economy and thus feeds on itself via
expectations. And an international comparison, courtesy of EPI
,
shows that the core U.S. inflation rate over the past two years is below
the OECD average.
Those who would crush the recovery for the sake of fighting inflation
tend to be macroeconomists. They look at overall demand in the economy
and do not deign to examine the micro-trends on the supply side. If they
did, they would find confirmation that most of what's driving the
inflation is supply shocks.
The other day, The New York Times
ran an instructive piece in which reporters sat down with the owner of a
high-end restaurant in Charlotte, North Carolina, called Good Food on
Montford, and examined every cost item that was causing him to raise his
menu prices. With the exception of labor costs, which have increased for
the restaurant by about 25 percent from 2019, virtually every other menu
increase can be traced to supply chain problems or price-gouging in the
context of scarce supply.
For instance, wholesale meat costs to the restaurant are way up (56
percent for steak, 50 percent for pork), but a lot of this is
price-gouging by suppliers in an increasingly concentrated industry.
There is also a shortage of truckers, reflecting policy failures in the
regulation of trucking. It's not clear how engineering a recession
with interest rate hikes would cause more truck drivers to materialize.
Most other increased restaurant costs can be traced directly to
international supply chain factors and the Russian invasion of Ukraine.
Global shortages translate to domestic price pressures. The
restaurant's utility bills are way up, reflecting higher global energy
prices. Its cost of new refrigerators, heavily dependent on imports, is
up 80 percent over three years ago.
None of this would be improved by dousing the recovery. As for the
higher labor costs, the fact that Good Food now pays a line cook $16 an
hour, rather than $12 an hour in 2019, partly reflects Charlotte's
tight labor market. But these wage increases are lagging the cost of
living, not leading it.
Nor is it the case that increased consumer demand, in the form of
increased dining out, is driving these higher meal costs. On the
contrary, the higher prices are all a function of the restaurant's own
increased costs, and they scare customers away.
It would be good for conservative macroeconomists to get out of the
office and have a close look at the actual economy.
~ ROBERT KUTTNER
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