The government’s latest data drop puts a big exclamation point on something you already knew: Prices for much of the stuff we all buy — gasoline, clothing, fruits and vegetables — are up sharply over just the past month. To be precise, the average cost of everything we buy is up 3.3 percent from a year before, way more than last month’s 2.4 percent rise. These numbers are pretty huge, the largest one-month jump since the pandemic.
Having to pay that much more for things we all need to buy is a big deal. This jump has wiped away almost all of the wage gains workers had made in the past year. And it comes on top of the already high prices that have made the economy feel so punishing. People have good reason to be upset.
So far, however, these are just one-time jumps in response to the war in Iran, comparable to the way prices rose when President Trump rolled out his tariffs but now appear to have more or less leveled off. There’s no reason to think we’re back to the days of crushing, long-term inflation, during which prices get higher and higher with no end in sight.
Inflation is the rate of change from month to month. So if prices go up and then stay there, inflation falls back to where it was before. That may seem like an academic distinction, but it’s important, because slowing inflation is the Federal Reserve’s job, and though its tools can be effective, they can also be pretty unpleasant. In this case, by contrast, getting these high prices back down would be much easier: All it would take is for President Trump to lift the tariffs, end the war and get traffic through the Strait of Hormuz flowing freely again. Simple, right?
The question, then — equally relevant for economists and for normal people grinding their teeth as they swipe their credit cards — is whether these prices will stay high, go higher or head back down to Earth.
If any of this sounds familiar, it’s probably because in 2021 we were contemplating the same possibilities. During Covid, multiple factors — including the damage to the supply chain and the cash that the government handed out to stabilize the economy — drove prices up and up. But most leading voices insisted the inflation was, to use the term of the day, transitory. Inflation came down only when the Federal Reserve abandoned that view, raised interest rates rapidly and slowed the labor market.
This is an inherently different moment. The 3.3 percent inflation rate this month is way below the peak of 9 percent reached in 2022. Moreover, that 3.3 percent includes increases in the price of food and energy — important costs, to be sure, but typically too volatile to indicate broad trends. In fact, right now futures markets are betting that gasoline will slip below $4 a gallon in the coming months.
Historically, the “core” inflation figure, which doesn’t include food and energy, has proved to be a much better predictor of where inflation is headed. And right now that figure is just 2.6 percent, a little higher than we’d all like it to be, but far from terrifying. After Russia’s full-scale invasion of Ukraine, core inflation rose to 6.5 percent.
In addition, the labor market is relatively loose, with more unemployed workers looking for jobs than openings for them to fill. Wage growth, according to many measures, is slowing.
So what now? Americans are worried about affordability. The main problems, things like housing and health care, have built up over decades and have no quick solutions. The problems caused by tariffs and the Iran conflict, on the other hand, have arisen much more rapidly — and they could be solved just as rapidly. Just not by the Federal Reserve. Raising interest rates, the Fed’s go-to inflation-fighting measure, would most likely mean higher mortgage rates and higher unemployment, both undesirable and also in this case unnecessary. If anything, the Fed should be ready to cut rates if we see the unemployment rate rise.
The biggest danger right now, economically speaking, is that consumers and businesses might decide, despite the evidence, that we actually are headed for a long run of inflation. Those fears become self-fulfilling as they cause businesses to raise prices and wages just because they expect others to. For now, it may really be the case that if we don’t let our worries get the better of us, we’ll all be OK. Or as another president put it when the nation was sinking into the Great Depression, when it comes to this month’s scary-looking inflation figures, the only thing we have to fear is fear itself.
Jason Furman, a contributing Opinion writer, was the chairman of the White House Council of Economic Advisers from 2013 to 2017.
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