Skip to navigationSkip to content
EMPLOYING A DIFFERENT POLICY

Why the US should ignore inflation and focus on jobs

Reuters/Brendan McDermid
The Fed has a job to do.
  • John Detrixhe
By John Detrixhe

Future of finance reporter

Published

Consumer prices, from used cars to airline tickets, shot up in the US last month. But some economists think policy makers in Washington can and should ignore seemingly eye-popping inflation data, and worry instead about the recovery in the labor market.

The consumer price index (CPI), which measures what people pay for goods and services like clothing and restaurant meals, soared 4.2% in April from a year before, the biggest increase in more than a decade, according to a Labor Department report yesterday. The so-called core price index, which excludes prices on food and energy, and can be more volatile, jumped 3% in April from a year before.

Why inflation is rising in the US

“The rise in the CPI today was overwhelmingly driven by transitory factors,” said Dean Baker, senior economist at the Center for Economic and Policy Research. Prices of used cars and trucks rose 10%, the biggest jump since 1953, amid a global shortage of computer chip supplies—vehicles accounted for about a third of the CPI increase. Car insurance went up 2% as more people drive, and the prices of hotel rooms and airfares leapt as more Americans are vaccinated against Covid-19, and begin traveling.

“These are either transitory and will be reversed or are simply making up for earlier pandemic declines in the case of airfares, car insurance, and hotels,” Baker said.

The debate over inflation has heated up after Congress pumped trillions of dollars into the economy, and as the Federal Reserve assures investors that it has little intention of increasing interest rates—which would act as a brake on rising prices—anytime soon. Higher inflation can be dangerous because it erodes the value of savings and investments.

But too much focus on containing prices can damage the job market. And research indicates that tightening interest rates too soon can worsen wage inequality, according to a report from the Economic Policy Institute. The organization says a number of factors have suppressed wages for low and middle age workers, many of whom are people of color, over the years. They include a declining minimum wage, globalization, the erosion of collective bargaining, and employer concentration.

Anti-inflation policies that have kept unemployment higher than it needed to be, responding to recessions with too little force, are high up on the list of decisions that have weakened wage growth for minorities and women, according to EPI economists Lawrence Mishel and Josh Bivens. “These policy changes and the change in business practices they enabled have systematically undercut individual workers’ market (exit and voice) options and the ability of workers to obtain higher pay, job security, and better-quality jobs,” the wrote.

There are signs that US Federal Reserve chair Jerome Powell aims to do things differently this time. He has said the central bank will let inflation run a little over its 2% target, and that he expects any jump in prices to be short-term in nature. That 2% target rate is an average, signaling that Powell is “comfortable” with a number higher than that in the near term as the economy restarts, Baker said.

“We know the long term consequences of Fed policy that locks in high unemployment for workers, particularly Black workers,” said Kyle Moore, an economist at EPI. “This most recent unemployment report shows us that the labor market isn’t close to a full recovery, particularly for Black men whose unemployment rate was over 10%. We don’t need to preemptively fight sustained inflation by cutting off a labor market recovery before it’s started in earnest.”

Even so, many are concerned that unprecedented government support for the economy could cause prices to rise much faster than Americans have experienced in years. The S&P 500 Index of large US stocks fell 2% yesterday, the biggest decline since February. The drop suggests investors aren’t convinced that price increases will be contained, and that the Fed may have to cool the economy by allowing interest rates to climb.

“The Fed believes inflation is temporary, and given the unusual supply and demand displacements created by the pandemic, there is logic to that perspective,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “But it seems to me the market believes the opposite.”

Ana Campoy contributed to this story.

📬 Kick off each morning with coffee and the Daily Brief (BYO coffee).

By providing your email, you agree to the Quartz Privacy Policy.