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The Inflation Crisis Is Over. You’ll Never Guess Who Deserves the Credit.

Jay Powell? The Fed? Joe Biden? Congress? The one percent? No, no, no, no—and definitely no.

Brian van der Brug/Los Angeles Times/Getty Images

The inflation crisis is over, and you can thank the poorest among us for delivering what (so far at least) is a soft landing. That isn’t the mainstream view yet, but eventually I think it will be.

The latest consumer price index report released Wednesday showed that inflation fell to 5 percent in March 2023 compared to March 2022. That’s the smallest increase in nearly two years. Inflation has been falling steadily since June, and “core” inflation (i.e., inflation minus volatile food and energy prices) has mostly fallen too. So has the Personal Consumption Expenditures, or PCE, index, the Fed’s favorite inflation metric. In February it was 5 percent, down 0.3 percentage points from the January figure; we’ll get the March number on April 28.

When a trend sustains itself over a period of 10 months, I’m inclined to judge it significant. When it’s a bad trend, everybody feels comfortable saying we’re in a crisis. When it’s a good trend, nobody wants to acknowledge it.

Why is this so? Partly because economic news has a natural bias toward the negative. Economic contraction is bad for obvious reasons, but economic growth is bad too, because it stokes fears of inflation, which in turn stoke fears of higher interest rates to combat inflation. Economic forecasters are a bit like my late grandmother, who possessed many fine qualities but never beheld a half-full cup in her life. When the Berlin Wall fell, she told me, “Sooner or later, somebody’s going to get knocked off.”

A more charitable explanation is that at any moment there are about a gazillion things that can go wrong in the economy, and it’s the experts’ job to keep track of what these are. Thus while the trend in “core” inflation is favorable, the trend in “supercore” inflation has been rising since January, according to Harvard’s Jason Furman, after falling sharply in the fall. Supercore inflation is inflation minus food, energy, used cars (which, like food and energy, is a volatile indicator), and shelter (removed because rent and home prices are lagging indicators). I’ve sometimes wondered whether there ought to be an indicator called “existential” inflation, which is inflation minus price changes in all goods and services. Existential inflation is unchanged since May 2020, and I’m sure there’s some expert somewhere willing to call that cause for concern.

We’ve not yet reached the Fed’s target inflation rate of 2 percent, which at any rate is probably too low. As a consequence, even the end of the inflation crisis won’t bring about an end to the Fed increasing interest rates. But it’s already brought an end to the Fed accelerating the pace of its interest rate hikes, which is also a hopeful sign. 

What does this have to do with low-income people? Well, it was low-income people who took it on the chin during the Covid recession (February–April 2020). Between January 2020 and March 2021, employment fell 13.1 percent for people earning more than $60,000, 23.3 percent for people earning $27,000 to $60,000, and 37.5 percent for people earning less than $27,000. Eleven months later employment was fully recovered for the first group and almost fully recovered for the second but still down by nearly a third for the third. This last group consisted disproportionately of fast-food, hotel, and health care employees working at a time when people were still reluctant to travel or eat out and all nonemergency medical procedures were being canceled.

Because it suffered the most, this group benefited the most from the various emergency spending programs enacted at the start of the pandemic: rental assistance, an expanded child tax credit, expanded Medicaid eligibility, enhanced unemployment benefits, expanded food stamp benefits, and, of course, those stimulus checks, which alone dropped the supplemental poverty rate (which, unlike the official poverty rate, includes government benefits) from 11.8 percent to 9.1 percent in 2020.

It’s axiomatic, according to conservative doctrine, that when the government gives low-income people money, they’ll stop working. But that didn’t happen. When the restaurants and hotels opened back up and nonemergency medical treatment resumed, low-income people went back to work.  But to lure them back employers had to increase wages, even after Covid benefits had expired. Why was this so? Writing in The American Prospect in January, Josh Bivens of the nonprofit Economic Policy Institute suggested that a major driver was something he called “severed monopsony.” Monopsony is the tendency of monopoly (in practice, oligopolies) to drive down prices by reducing competition for workers. Severed monopsony is a temporary circumstance in which workers suddenly have time they don’t usually enjoy to cast their net wider for employment opportunities, thereby enhancing their leverage. By this analysis, which I find persuasive, the worker shortage so decried by employers, which is mostly over, should be blamed not on socialism (enhanced government benefits) but on capitalism (enhanced market power for workers).

As a result of their enhanced leverage, low-wage workers (defined as the bottom 10 percent) saw the fastest wage growth during the Covid recovery of any group all the way up to the ninetieth percentile. Real wages for these workers grew 9 percent on average between 2019 and 2022, according to EPI, more than twice the growth for middle-class workers (i.e., the twentieth to eightieth percentiles), with increases tapering off as you rose from lower to higher percentiles. That tapering reversed itself at the ninetieth percentile, where the wage increase on average was 4.9 percent. But that was still well below the 9 percent increase at the bottom.

It was almost as if we’d entered an alternative universe in which income inequality had been reversed. I say “almost” because income growth was still fastest for the fabled one percent (at 16 percent) and 0.1 percent (29.2 percent). The rich got richer, but the poor didn’t get poorer.

Another economic axiom is that rising wages at lower incomes is more inflationary than rising wages at higher incomes, because the rich spend a smaller proportion of their income on goods and services and anyway there are fewer of them. So, yes, the low-wage-driven recovery from the Covid recession was inflationary. But it wasn’t very inflationary, because the wage growth was concentrated at the very bottom, and even when poor folks have more to spend, it still isn’t a hell of a lot.

The workers’ paradise of severed monopsony isn’t going to last. Like a lot of economic phenomena during the past three years, it was the freak result of the Covid epidemic. Hourly wage growth is already falling in the leisure and hospitality sector, where a lot of these low-wage jobs reside, and union membership continues to fall. What the economic recovery has taught us is that even a rapid rise in income for America’s poorest citizens is pretty much all upside for the broader economy. That’s a good argument for raising the hourly minimum wage at the national level (it’s still a paltry $7.25) and making it easier for all workers, but especially low-wage workers, to join unions by passing the Protecting the Right to Organize Act. It’s also an argument for the Fed not to get too overzealous next month when it decides what the next interest-rate hike should be.