The End of the ‘War on Inflation’ Despite Experts’ Misunderstanding

The battle against inflation is coming to an end, much like other conflicts that draw attention but eventually settle down, such as wars in Ukraine or Gaza. While shoppers are still anxious, especially about the rising cost of eggs and other groceries, many economists and commentators continue worrying about inflation and various prices, particularly after January’s Consumer Price Index showed an increase.

Yet, it’s essential to realize that most people are focused on past issues rather than what’s happening now. Inflation has severely affected households since 2021, causing great concern. The Consumer Price Index (CPI) as of January was 23.4% higher than in December 2019, which doesn’t quite capture the everyday frustration many shoppers feel. Although the end of a war doesn’t reverse any destruction caused, the same is true with inflation; it won’t simply cancel out higher prices.

It’s key to differentiate between prices and inflation. Inflation refers to how fast prices are increasing, which is currently at 3% compared to last year, according to CPI figures. Overall, prices do not tend to drop significantly. There may be slight decreases in specific categories, but generally, prices are unlikely to go down on a wide scale. This stagnation often leads to an economic state called deflation, which is more harmful and can lead to severe economic decline.

Achieving a reduction in prices to match pre-pandemic levels would be akin to repeating the economic downturn of the late 1920s and early 1930s, which isn’t a desirable situation for anyone. The goal in managing inflation was never to lower prices drastically but to control their rate of increase. The Federal Reserve aims for a modest annual inflation rate of around 2%. While inflation peaked at 9.1% in June 2022, it has since dropped to 3.0% by January, a minor fluctuation in the grand scheme.

Another measure, the personal consumption expenditures price index, reported a 2.6% increase in December, which caused concern among some analysts. However, there’s no solid evidence that the Federal Reserve can fine-tune these numbers accurately. Interestingly, the rise in rental prices significantly influences the CPI, especially through a confusing concept called “owner’s equivalent rent,” which suggests what homeowners would pay to rent their homes, though no one actually pays that amount.

When looking past rental costs, December’s CPI shows a 1.9% increase, even considering the surge in egg prices due to factors like bird flu. The Fed isn’t aiming for a much lower inflation rate, so don’t expect drastic changes in the foreseeable future. Inflation is primarily a result of too much money available for too few goods and services. The Federal Reserve is responsible for this situation, creating too much money during the upheaval of COVID-19.

In 2020, money supply grew at alarming rates, which eventually led to rising prices. Now, the growth rate has slowed down considerably. Wage growth, often blamed for inflation, doesn’t contribute to price increases, a detail that frequently escapes economists’ attention. Furthermore, tariffs imposed during President Trump’s time in office do not primarily affect the money supply. While they can influence prices, their overall effect on inflation is minimal, often balancing out with other price changes.

Overall, it’s time for investors to look beyond the currently discussed inflation fears and recognize that the situation is stabilizing. The so-called war on inflation is winding down. It’s a good moment to be optimistic about the future.