We are a few days short of an exciting event - at least if you are a nerdy economist who is also concerned that we often focus on the wrong pieces of information. 

Next week the government will release the December 2022 consumer price data that I suspect will give a clear six month picture of price increases that have moderated in the traditional 2-3% range. If you take out the most volatile food and energy elements from the inflation equation, and recognize that the single biggest force in our consumer basket is the cost of shelter, which is declining rapidly as housing prices drop, then inflation has been tamed, this nerd expects. 

Now, I have lamented that the Fed has put their chair reappointment politics aside and should have just done the right thing a year ago, but we all see that their desperate and rapid increase in interest rates are starting to bite. That is a little too late, and maybe a little too little as a consequence, but it is still moving expectations of a steady hand on the helm in the right direction. 

The Fed deserves no credit, though, in turning the current inflation around. A less harsh winter, rapid responses to the European energy crisis, citizens’ concern about an impending global 2023 inflation, and our greater economic caution have all culminated in a significant decrease in aggregate demand, despite all the efforts of our elected officials to spend, spend, spend, for more than a dozen years now. 

What the Fed has done, though, is slow the housing demand boom and deflate the housing and financial asset bubbles. There is nothing like a stoking of the fear of a potential recession to take the steam out of overheated markets. For that I given the Federal Reserve justified credit. They may not be providing the leadership for which I might have hoped, but they are well-playing their bit part. 

Our collective level of investment depends on our risk adjusted rate of return.  There remain significant risks and few strong opportunities for returns. These factors combine to yield a low real rate of interest. In fact, many of us are for the first time in decades looking more carefully at the risk-free rate of return on boring government bonds as a pretty attractive investment. Excessive government spending is crowding out other investment opportunities and moderating growth even more. Global economies are recessionary, and we have likewise pulled out of our inflationary spiral.

If we may well ward off runaway inflation, we still have a lot of work to do to get our economies firing on all cylinders. Economic policies in the largest economies but China still remain fragmented and incomplete. That will not likely change, especially as the U.S., still the world’s largest economy until perhaps the end of the decade or so, remains politically rudderless and dysfunctional. But, no policy can be effective if there is no price predictability, so at least the foundations for success have been established. 

The week following next, we will have even more data available, from the producer price index. I fully expect it will reinforce what I believe we shall see next week. Core inflation, excepting food and energy, has stabilized, and so have food and energy, for that matter. The Inflation Reduction Act has at least produced a dialog regarding infrastructure investment in alternative energy and we shall see if it gains true traction. And, leaders now realize we must repatriate such industries as semiconductor chip production. These are all hopeful signs. We shall wait and see if they succeed. 

If the foundation is now established and we are at least engineering an appropriate industrial structure, that should at least give us some optimism. I’m willing to look at 2023 with some cautious optimism. My only fear is an underestimation of the risks and a belief that maintenance of the status quo is all we need for success. That’s on us. That’s why I am only cautiously optimistic.