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It’s time to declare victory in the inflation fight
And for the Fed to stop raising rates, and hurting the workers
Inflation data released today offered some of the most hopeful news since the Federal Reserve began trying to tame rapid price increases 16 months ago. It’s reason for it to stop raising rates.
The consumer price index was at 3% for the month of June, compared to the year before. This is a significant improvement from the May figure, which was 4%. And a major improvement from last year’s peak of 9.1% in June. The last time inflation neared 3% was in March 2021.
So will the Fed please now declare victory? Yes, I know, the Fed has an inflation target of 2%, and some Fed officials have recently signaled they’re likely to raise interest rates again at their July 25-26 meeting.
But it’s time to stop, because higher rates will slow the economy — and a slower economy will hurt lower-wage workers.
The strong jobs economy — brought on by the double whammy of lower rates and the much maligned $1.9 trillion recovery bill that Congress passed in the late winter of 2021 — has been a boon to lower-wage workers.
According to a study by economists David Autor, Arindrajit Dube, and Annie McGrew, that strong economy enabled many workers — predominantly young, with no more than high school educations, working overwhelmingly in low-wage service-sector jobs — to quit their old jobs in 2021 and 2022 for better-paying ones.
It was chiefly they who were doing the quitting and moving to better jobs over the past several years. Autor, Dube, and McGrew document that the workers who quit their jobs didn’t just quit; they overwhelmingly found new employment that paid better.
This, in turn, has reduced inequality in America. It has shrunk the pay gap between college-educated and non-college workers (and that between the 90th income percentile and the 10th income percentile) by a full 25%.
So large were these gains among low-wage workers that they were the only group of workers over the past two years who have seen wage increases that outpaced the rise in inflation.
In other words, a tight labor market reduces inequality. The only reason the Fed has had to slow the economy and loosen the labor market is to reduce inflation. But today’s data shows that inflation is way down. So the Fed should declare victory. Now.