This article was originally published by the Milken Institute Review on December 22nd, 2022.
“Prices rose 7.1 percent in November,” wrote the Washington Post in December, responding to the monthly report from the Bureau of Labor Statistics. Although the paper did note that the headline number was down a bit from the month before, it characterized inflation as still “way too high for a healthy economy.”
The New York Times also headlined the 7.1 percent rise in the price level since November of the previous year. It helpfully explained why such numbers worry many: “If price increases remain rapid for a long time, consumers could begin to expect that to continue. They might demand heftier wage increases in response, and if they win those raises, their employers may institute more regular and rapid price increases to cover climbing labor bills.”
I’m worried, too, but for a different reason. My concern is that news reports like these are keeping public attention focused on the wrong indicator at a time when inflation is slowing a lot more rapidly than the headline rate of seven-plus percent suggests. If we look closely, we see that most of that increase — more than six percentage points — took place between November 2021 and June 2022. Inflation from July through November has added just 1.1 more percentage points to the total.
Why does it matter? Because, if families, business leaders and government decisionmakers keep watching a misleading inflation indicator, they risk making serious mistakes. It is as if they were driving their cars while watching the wrong instrument on their dashboards. Let me explain.