Derek welcomes Jason Furman back to the show to talk about some of the most pressing economic questions right now
- Why have home and auto insurance prices skyrocketed?
- Why did inflation stop falling in 2024?
- How did economic experts get their disinflation forecasts so wrong?
- What sticky-high prices are preventing further disinflation?
- Are interest rates going to be higher for years?
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In the following excerpt, Derek and Jason Furman investigate why the disinflation trend has stalled and why so many forecasters incorrectly predicted where inflation would be this quarter.
Derek Thompson: You’re not a foul-weather friend. Well, you started off very foul-weather because, actually, I know that when we first had you on the show in late 2021—and you really have been with us for the entirety of our American inflation journey—that was when inflation was just beginning liftoff, and there was a lot of skepticism, I think particularly on some parts of the left, that inflation was a real phenomenon.
Obviously, in the last three years, we’ve learned it’s a very, very real phenomenon. CPI inflation spiked at 9 percent in mid-2022. Since then, as I’ve covered in the show, as I’ve had you back and back and back to talk about, we’ve had some good news to discuss, which is disinflation. The inflation rate has come down a lot in the last year, and a lot of people, a lot of economists—including me, not an economist, but I’m a person—were very optimistic about the path of disinflation, very optimistic that inflation would just keep falling, but we appear to have stalled out in our journey back to 2 percent. In your own words—just take the stage here, and I’m interested in the story as you tell it—what happened to the disinflation story?
Jason Furman: Yeah, so if you’re asking with that tone, you have to decide what your reference point is. If you asked me what I thought a year ago, a year and a half ago, and what most people thought, we are still in much better shape in terms of disinflation. The underlying inflation rate, there are lots of different ways to measure it, but it’s probably something like around 3 percent right now. It was much higher than that, and it’s come down, and it’s come down without a recession. So I feel pleasantly surprised compared to what Jason January 2023 thought.
If you ask me how I feel compared to Jason January 2024, there I’m disappointed; there I’m worried about this evaporating. You look at something like the Survey of Professional Forecasters: The inflation we just got was 1.2 percentage points higher in the first quarter than they had forecast as recently as February of this year. That is about as big a miss as you have from them outside of the really crazy period of COVID. So, things have changed quite dramatically from inflation looking like, “Hey, it might even be below 2 percent,” to, “Uh-oh, maybe it’s back above 3.”
So, you asked me what happened. I think part of it is that every time you see really high inflation, it’s partly bad underlying and it’s partly bad luck, and whenever you see really good inflation, it’s partly good underlying and it’s partly good luck, and the luck tends to go away. So, we were probably doing a better job finding all the excuses for why high inflation was transitory when we should have also been doing the same mental exercise to understand how some of the low inflation was transitory.
Thompson: So you mentioned the Survey of Professional Forecasters, that’s the Fed’s Survey of Professional Forecasters, and in February 2023 and several times throughout last year, they predicted that core CPI, core inflation this quarter would be below 3 percent. As you just said, it’s not below 3 percent; it’s 4.2 percent. That’s a meaningful miss. That’s one of the largest misses they’ve had in decades. Let me put the question to you this way: Why did they miss as large as they missed? What did they expect to happen, do you think, that didn’t happen?
Furman: Right. So inflation, there’s always a micro-perspective and a macro-perspective. So there are some micro-stories, like auto insurance premiums are skyrocketing; that is a surprisingly large part of the excess inflation we’ve seen in recent months. Also, there was this hope that the growth in the cost of what’s called shelter, which includes rent but also the implicit rent that you pay to yourself if you own your home, was going to slow dramatically. That slowing has stalled out for the last couple of months, and that matters especially for the CPI, where it has quite a large weight. The Fed targets something called the PCE, which has a smaller weight on housing, but it matters a lot for both of them.
So you can do those types of micro-factors, but I think there’s also a macro-story here, which is in January, price inflation was around 2 percent, but wage inflation was still around 4.5 percent. The wage inflation was more like what you saw in a 3.5 percent price inflation world, and I think that wage inflation has a certain signal. It means all the pieces of the economy weren’t fitting together in a way that was low inflation; it didn’t look like the economy of 1990. It did in terms of prices, it did not in terms of wages.
The hope was maybe that was lagged and the wages would catch up, but I think throughout this, wages have been a pretty good signal. They’re not affected by the same noise as used cars and eggs and insurance premiums. Each one of these things, it has a different story. You don’t quite have that in wages. Yes, to some degree, they’re lagging, but to some degree, they’re leading, and people looking at those would’ve been less fooled by the disinflation than people just looking at prices.
This excerpt was edited for clarity. Listen to the rest of the episode here and follow the Plain English feed on Spotify.
Host: Derek Thompson
Guest: Jason Furman
Producer: Devon Baroldi
Subscribe: Spotify