NEW YORK — A few days ago, driving past my regular gas station in New Jersey, I saw gasoline priced at $3.87 a gallon (about 3.78 liters) and abruptly swung the wheel toward it. I happened to recall writing a story that the average price of regular gasoline in the United States had topped $4 a gallon starting the 20th of last month, so even though my tank was reasonably full, I went out of my way to fill it up. I had to laugh at myself for checking global oil prices every day and weighing whether to refuel. It was only a few months ago that, living in the greater New York area where everything costs more than three times as much as in Korea, I reassured myself that "at least the U.S. is an oil producer, so gas is cheap." Until the war with Iran began on Feb. 28 this year, gasoline at this station had never exceeded $3 a gallon.
In the United States, where public transit is inconvenient, the prices of gasoline and diesel are tied to almost all logistics and transport costs. Because they affect inflation immediately in response to geopolitical risk, energy prices are even excluded when calculating core inflation. As recently as May 2020, before murderous price increases surfaced amid the COVID-19 pandemic and large-scale monetary easing, U.S. gasoline sold for around $1 a gallon.
After June and July readings of the consumer price index (CPI) and producer price index (PPI) came in at or below Wall Street expectations for two straight months, the term "disinflation" — a slowdown in the pace of price growth — has recently begun circulating in some quarters. Expectations have grown somewhat that, with price growth no longer accelerating, the Federal Reserve has less room to raise its benchmark rate. It is true that inflation has slowed in nominal terms: U.S. CPI growth, which peaked at 4.2% year-on-year in May, fell to 3.5% in June and 3.4% in July. Growth in the personal consumption expenditures (PCE) price index, the gauge the Fed weighs most heavily in setting rates, also eased from 4.1% in May to 3.7% in June.
The problem is that the current inflation was not set off by ordinary swings in demand. Its core cause is the supply shock stemming from U.S. President Donald Trump's tariffs, in place since last year, and the war in the Middle East. Monetary and fiscal policy can move aggregate demand but cannot directly resolve aggregate-supply problems such as a surge in oil prices. A complacent response could reprise the worst stagflation of the 1970s — recession alongside rising prices — that arose when the low interest rates engineered under former President Richard Nixon collided with the oil shocks.
When abnormal prices become routine, one's sense of the numbers dulls. Even the figures said to have eased remain far above the Fed's target. The 2% inflation target the Fed set under Chairman Ben Bernanke starting in 2012 assumes the most stable state — one in which real prices barely rise while economic growth does not fall into negative territory. According to the minutes of last month's Federal Open Market Committee (FOMC) meeting, many members likewise argued that rates should be raised if price growth does not come down to around 2%.
Heightened price volatility also makes it hard to read much into figures from a month or two ago. Brent crude futures, the benchmark for global oil prices, exceeded $100 a barrel through May and stabilized only after the United States and Iran signed a memorandum of understanding (MOU) to end their conflict in June. After that agreement was neutralized and armed clashes between the two sides resumed last month, prices rebounded and are now moving back above $90. Tankers passing through the Strait of Hormuz are still few.
The movement of money is more honest than any words. Because of the fear of inflation running beneath the market, Wall Street capital still cannot easily rotate into any particular asset. Indeed, yields on 10-year and 30-year U.S. Treasuries have soared to their highest since the global financial crisis, in both the primary and secondary markets. Even after the U.S. Treasury intervened in the yen-dollar market by buying yen for the first time in 28 years and signaled a larger Treasury buyback program, the market has not budged. No investor will trust a policy that seeks to push market rates down artificially while leaving the fundamental drivers of inflation untouched — U.S. federal debt now above $40 trillion, soaring memory chip prices and intensifying competition among Big Tech firms over massive investment in artificial intelligence (AI). The reason Nvidia keeps pouring money into Big Tech, despite criticism that it amounts to circular dealing, lies in the fear that if AI funding dries up in a high-rate environment, the chip industry could go down with it.
Premature optimism about inflation could return as an irreversible shock to the economy. That is also why Wall Street has not lowered its odds of a Fed rate hike in September from around 40%. Add to that the possibility that, ahead of the midterm elections in November, the Trump administration attempts excessive economic stimulus, and Korea, too, must keep price uncertainty firmly in mind as it maps out its short-term economic strategy.
