If you did a double-take reading that headline, you're not alone. As strange as it may sound, inflation has already been beaten for the most part, and now the underlying trend has shifted in the opposite direction. First, the second derivative of price level (with respect to time) has turned negative many months ago, then the first derivative turned negative on a monthly basis more recently in December. Inflation has apparently peaked in June 2022. And consumer demand has been falling for many months now as well. While we had two consecutive quarters of real GDP growth following two consecutive quarters of real GDP shrinking, we are still not out of the woods for a potential recession in 2023 either. There is always a lag before the actual effects of monetary policy kicks in, usually at least two quarters, sometimes as long as four quarters.
The M2 money supply literally shrank for the first time since 1960 as well in 2022, albeit following an unprecedentedly high growth rate in 2020-2021. Usually a shrinking money supply does NOT bode very well for the economy. And that is a result of both fiscal and monetary tightening in 2022.
And while the labor market remains "tight", there is no real "wage-price spiral", and never was in recent years, since while wages rose, they rose less quickly than prices did overall. Thus, no spiral happened.
And while China's reopening will stoke pent-up demand for goods and services globally, which is inflationary, that same reopening will un-snarl any remaining snarls in the global supply chains, which is disinflationary, especially now that their "exit wave" of the virus has finally peaked and fallen.
After all, as we have noted before, the REAL root cause of the recent inflationary episode was the repeated and protracted global supply chain disruptions caused by the lockdowns and shutdowns, which of course greatly shrank supply of many goods and services. And the unprecedented levels of money printing to paper over the predictable consequences, which (upon reopening in the West) stoked demand for goods and services at the same time that supply remained reduced, was like gasoline on the fire, worsening the supply-demand mismatch. Of course, without printing all that money, and/or without eventually reopening, there would have been a full-blown Greatest Depression, and the architects of the lockdowns and shutdowns would have all been sent to the guillotine within a matter of weeks.
(The Russia-Ukraine war clearly didn't help, as both the war and the sanctions created artificial scarcity of oil and gas, but the general inflationary pressures were of course already there before the war began.)
Honestly, had the entire world simply "adopted the flu strategy" from the start of the pandemic, the supply chain disruptions and other economic effects would really not have been any worse than the 1957-1958 or 1968-1969 flu pandemics. (Yes, you read that right: we literally had WOODSTOCK in the middle of a pandemic!) And while some fiscal and monetary stimulus would probably have been necessary, it would have been only a fraction of what was done.
It's not like the FERAL Reserve can actually do anything about supply chains anyway. Hiking interest rates and/or shrinking the money supply can obviously quash demand, of course, but does absolutely zilch about the underlying cause of the inflation, which turned out to be largely transitory.
Thus, all signs strongly imply that the FERAL Reserve needs to stand down and stop QT and stop hiking interest rates, and start cutting them yesterday. Seriously. But given their tendency to overcorrect, they probably will do so in that regard. And given how deflation is more harmful than inflation, they need to answer the "clue phone" before it's too late!
And Congress may even need to get a new round of stimulus checks ready as well, since they may be needed sooner rather than later to cure an incipient deflationary spiral. And of course, they need to stop playing "chicken" with the debt ceiling yesterday!
UPDATE: And now that the FERAL Reserve raised rates yet again, the above applies a fortiori now.
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