By James Pethokoukis

Item: Inflation accelerated further in May, with prices rising 8.6 percent from a year ago for the fastest increase since December 1981, the Bureau of Labor Statistics reported Friday. The consumer price index, a wide-ranging measure of goods and services prices, increased even more than the 8.3 percent Dow Jones estimate. Excluding volatile food and energy prices, so-called core CPI was up 6 percent, slightly higher than the 5.9 percent estimate. On a monthly basis, headline CPI was up 1 percent while core rose 0.6 percent, compared with respective estimates of 0.7 percent and 0.5 percent. Surging shelter, gasoline and food prices all contributed to the increase. – CNBC

So, not good. Intrinsically bad, really, and also bad versus expectations. Bad in the details, too. More than a few economists pointed out that there seem to be areas of the economy where price increases are looking like they could be a long-term problem. For example, this from JPMorgan: “In particular, we don’t see clear reasons why the rent measures (which have a fairly large weight in the CPI basket) will cool any time soon, and the May increases for tenants’ rent and OER were the firmest monthly readings for these series in multiple decades.” What’s more, “the across-the-board strength in core inflation,” says the economics team at Goldman Sachs, “tips the balance for the Fed to continue its 50bp-per-meeting pace of tightening through September.”

We should all hope for the Federal Reserve’s success in threading the needle here—bringing down inflation without bringing down the economy. But the chances of a downturn are hardly insignificant. And the reason we want to avoid even a mild recession, if possible, is not just because we hate it when the GDP line goes down. Let me again refer to the excellent 2021 NBER working paper “The Recovery From The Great Recession: A Long, Evolving Expansion” by George Washington University economist Jay C. Shambaugh and my AEI colleague Michael R. Strain. The paper discusses the value of long expansions, especially for lower-income Americans (bold by me):

A slow and steady recovery followed the Great Recession’s official end in the summer of 2009, but because it was slow and the depth of the recession so deep, it took years to reduce slack in labor markets. But because the slow-and-steady recovery lasted so long, many pre-recession peaks were exceeded, and eventually real wage growth began to accumulate for workers across the distribution. In fact, the business cycle (including recession and recovery) beginning in December 2007 was one of the better periods of real wage growth in many decades, with the bulk of that coming in the last years of the recovery.Another lesson from the recovery from the Great Recession is that low-wage workers and low-income households are relatively more sensitive to the business cycle. These groups were hit harder by the downturn, and the gains in the early years of the recovery did not reach them. But they also benefited disproportionately from the tightening labor markets that characterized the recovery’s final years. Had the recovery ended earlier, those benefits would not have materialized. The final years of the recovery indicate that tight labor markets are the most effective jobs and wages program in the government’s policy arsenal. In addition, conventional measures of income inequality show that its growth has stagnated or even declined since the Great Recession began . . . If the goal is to ensure that the benefits of an expansion reach low-wage workers and low-income households, then fiscal and monetary policy need to respond aggressively to downturns and to allow expansions to continue until there is tangible evidence of supply constraints and inflationary forces taking hold.

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