Economist Paul Krugman: Inflation 'will probably fall significantly' — but the problem isn’t over

In 2022, the U.S. economy has had both good news and bad news. The good news: According to the U.S. Bureau of Labor Statistics (BLS), unemployment fell to 3.6% in March — which is the lowest unemployment the United States has had in more than half a century. The bad news: the U.S. is also seeing its worst inflation in 40 years.

Liberal economist Paul Krugman, in his New York Times column and his Twitter posts, has been stressing that despite the pain that inflation is inflicting on consumers, the U.S. economy is “booming” in the Biden era. Krugman revisits the inflation issue in his April 12 column, predicting that “inflation will probably fall significantly over the next few months” but warning, “the better numbers we’re about to see won’t mean that the inflation problem is over.”

“The inflation report for March came in hot, as expected: Consumer prices are up 8.5% over the past year,” Krugman notes. “But more than two years into the pandemic, we’re still living on COVID time, where things can change very fast — so fast that official data, even about the recent past, can give a misleading picture of what’s happening now. In this case, the Consumer Price Index — which, roughly speaking, measures average prices over the month — probably missed a downward turn that began in late March and is accelerating as you read this.”

But Krugman adds that readers shouldn’t “get too excited,” as “the better numbers we’re about to see won’t mean that the inflation problem is over.”

Krugman explains, “Why expect inflation to come down? Surging gasoline prices accounted for half of March’s price rise, but it now appears that the world oil market overshot in response to Russia’s invasion of Ukraine. A lot of Russian oil is probably still reaching world markets, and President Biden’s million-barrel-a-day release from the Strategic Petroleum Reserve makes up for much of the shortfall. As of this morning, crude oil prices were barely above their pre-Ukraine level, and the wholesale price of gasoline was down about 60 cents a gallon from its peak last month.”

The economist/Times columnist notes, however, that “the U.S. economy still looks overheated.”

“Rising wages are a good thing,” Krugman writes, “but right now, they’re rising at an unsustainable pace…. This excess wage growth probably won’t recede until the demand for workers falls back into line with the available supply, which probably — I hate to say this — means that we need to see unemployment tick up at least a bit.”

The economic conditions of 2022 are much different from the economic conditions of the early 1980s, when the U.S. suffered a painful combination of soaring prices and high unemployment.

“The good news is that there’s still no sign that expectations of high inflation are getting entrenched the way they were in, say, 1980,” Krugman observes. “Consumers expect high inflation in the near future, but medium-term expectations haven’t moved much, suggesting that people expect inflation to come down a lot.”