Opinion | That Was the Stagflation That Was

On Wednesday the five-year breakeven inflation rate fell to 2.48 percent. If that doesn’t mean anything to you — which is completely forgivable if you aren’t a professional economy-watcher — try this: The wholesale price of gasoline has fallen about 80 cents a gallon since its peak a month ago. Only a little of this plunge has been passed on to consumers so far, but over the weeks ahead we’re likely to see a broad decline in prices at the pump.

Incidentally, what are the odds that falling gas prices will get even a small fraction of the media coverage devoted to rising prices?

What these numbers and a growing accumulation of other data, from rents to shipping costs, suggest is that the risk of stagflation is receding. That’s good news. But I’m worried that policymakers, especially at the Federal Reserve, may be slow to adapt to the new information. They were clearly too complacent in the face of rising inflation (as was I!); but now they may be clinging too long to a hard-money stance and creating a gratuitous recession.

Let’s talk about what the Fed is afraid of.

Obviously we’ve had serious inflation problems over the past year and a half. Much, probably most, of this inflation reflected presumably temporary disruptions of supply ranging from supply-chain problems to Russia’s invasion of Ukraine. But part of the inflation surge also surely reflected an overheated domestic economy. Even those of us who are usually monetary doves agreed that the Fed needed to hike interest rates to cool the economy down — which it has. The Fed’s rate hikes, plus the anticipation of more hikes to come, have caused the interest rates that matter for the real economy — notably mortgage rates — to soar, which will reduce overall spending.

Indeed, there are early indications of a significant economic slowdown.

But the just-released minutes of last month’s meeting of the Fed’s Open Market Committee, which sets interest rates, suggest considerable fear that just cooling the economy off won’t be enough, that expectations of future inflation are becoming “unanchored” and that inflation “could become entrenched.”

This isn’t a foolish concern in principle. Over the course of the 1970s just about everyone came to expect persistent high inflation, and this expectation got built into wage- and price-setting — for example, employers were willing to lock in 10-percent-a-year wage increases because they expected all their competitors to be doing the same. Purging the economy of those entrenched expectations required an extended period of very high unemployment — stagflation.

But why did the Fed believe that something like this might be happening now? Both the minutes and remarks from the chair, Jerome Powell, suggest that an important factor was a preliminary release of survey results from the University of Michigan, which seemed to show a jump in long-term inflation expectations.

Even at the time, some of us warned against putting too much weight on one number, especially given the fact that other numbers weren’t telling the same story. Sure enough, the Michigan number was a blip: Most of that jump in inflation expectations went…