Macro Minute: Week of February 5, 2024

I was listening to a podcast the other day. In it a comment was made about how inflation is coming down, but prices are still elevated. I think it is important to unpack that. Inflation is the rate of change of increasing prices. If milk goes from $2.00 to $3.00, that is a 50% increase in the inflation rate of milk. If it then goes to $3.25 from $3.00, that is an 8.33% rate of inflation.

One could honestly say that inflation had come down a lot, but the price was still high. It is also true that people still remember $2.00 milk if little time has passed. This is a reason why sentiment surveys have shown more discontent, because lower prices are still fresh in people’s memories.

I want to caution us from wanting the opposite of inflation, deflation. In deflation prices go down, $3.00 to $2.00 in our example. While this may feel great for a very short amount of time, the result of that is a vast contraction in the economy. The only time we have had widespread deflation for a long period of time was The Great Depression. Nobody wants that.

The key is to have economic growth that is steady and that rewards owners and workers with asset price appreciation and wage increases that outpace inflation. This is why the Federal Reserve has the mandate of stable prices and full employment to try and ensure a fair and equitable growth in the U.S. economy.

That’s it for this week. I just had this thought while listening to the podcast and I thought it would make an interesting Macro Minute. Both high inflation and deflation should be avoided.

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