Decoding Harris and Trump on Inflation

In a column for the Atlantic nearly eight years ago, journalist Salena Zito said “the press takes [Trump] literally, but not seriously; his supporters take him seriously, but not literally.”

It was a remarkably astute distinction for the run-up to the 2016 election.

But his characterization has proven false. In office, we have learned sometimes to take Trump seriously, sometimes literally, sometimes neither, and sometimes both. In short, everyone has had to engage their critical faculties on different issues rather than rely on his original observation.

So what should we make of the statements on inflation and the Federal Reserve made last week by the two US presidential candidates, Kamala Harris and Donald Trump?

Take Harris seriously, not literally

There’s no doubt that Kamala Harris feels the need to talk about inflation. Last week, her campaign speeches in Pennsylvania, Wisconsin, Michigan, Arizona, and Nevada all contained some version of the following remarks (these are from Michigan).

We believe in a future where we lower the cost of living for American families, so they have a chance not just to survive, but to get by. Because, look, while our economy is doing well in many ways, the prices for everyday things, like groceries, are still too high. You know it and I know it.

When I was attorney general, I fought price fixing. And when I am president, my priority will be to fight to lower prices; to confront big corporations that engage in illegal price gouging; to confront corporate landlords that unfairly raise rents for working families; to confront Big Pharma; and to limit the cost of prescription drugs for all Americans. This is the work we will do together.”

Note that this is not about disinflation, but about an ambition to lower prices and some specific areas in which Harris would like to act. Taken literally, this is an invitation to the Fed and other parts of the government to lower the price level and seek deflation. If this were literally true, the only valid response would be: “you can’t be serious.”

Fortunately, there is an excellent source available that allows us to clearly interpret the thinking behind Harris’ words. In fact, Jared Bernstein, chairman of President Joe Biden’s Council of Economic Advisers, wrote it late last month.

AVsceker an eloquent and rather standard explanation of the causes of inflation, Bernstein noted something that I have also insisted on.

Economists are obsessed with rates; ordinary people are obsessed with levels… A central banker wants inflation back to his target. A buyer wants his old price back.”

Now, Bernstein and, I assume, Harris don’t explicitly want deflation, but they recognize that people have powerful rules of thumb about how much things should cost.

As long as inflation is low, these can slowly adjust without any problems. But when inflation is high, Bernstein said, many more of these rules of thumb are broken and “there is a disruption in the atmosphere.” It could take two years to heal, he added. For example, he noted the increase and subsequent recovery in the number of hours it would take typical manufacturing workers to earn enough for a week’s worth of groceries (below).

The most important passage to understand Harris’ words is the following:

Vibrations matter, and economists risk speaking without the words of the people if we fail to recognize that both inflation rates and price levels matter. We are acutely aware of this in the Biden/Harris administration, and it is a major reason for our cost-cutting agenda.”

Harris calls for price- and cost-cutting measures not because she believes in deflation, but because she believes that these actions, which would involve changes in relative prices, are essential to help people restore their rules of thumb about the price level and slowly accept that they will not be worse off aVsceker the period of inflation.

The bottom line: Take Harris seriously, but not literally. And read Bernstein’s entire speech. It explains everything.

Harris on the Fed

Harris also spontaneously answered some questions from reporters. AVsceker her rally in Phoenix, Arizona, on Saturday, she promised a big speech on the economy this week and reiterated her support for an independent Fed. I think we can take the following seriously and literally (1m25s in this video).

The Fed is an independent entity, and as chairman, I would never interfere in the decisions the Fed makes.”

Don’t take Trump’s word for it

If Harris’s campaign speech was carefully chosen and required an economics lesson to explain, Trump’s comments on inflation and the Fed were improvised and can be summed up with the phrase “I’m the best.” He made that clear in Thursday’s press conference (72 minutes).

The Federal Reserve is a very interesting thing and in some ways it has gotten a lot wrong and [Powell’s] he tends to be a little late to things. He comes a little too early and a little too late and, you know, it’s mostly a hunch, I think it’s really a hunch and I’ve taken it out on him. I’ve taken it out on him a couple of times very harshly.

I fought him hard and, you know, we get along, we get along, but I think a president should at least have a say, yeah, I feel that strongly, I think in my case I’ve made a lot of money. I’ve been very successful and I think I have better instincts than a lot of people who would be in the Federal Reserve or the presidency.”

I am sure no one should take this literally. I don’t think we should take it entirely seriously, and certainly not write that Trump is stoking fears about the independence of the Fed like the Wall Street Journal did. That said, there will be a lot of uncertainty at the Fed if Trump wins. I can also report that yesterday’s chat with Elon Musk about X added little.

While Trump’s Fed comments above were a rambling mess, it’s important not to dismiss the former president. He also understands that levels matter more than rates for relevance, as when he says “there are people dying financially because they can’t buy bacon” (59 minutes). This will be tough for Harris even if Trump’s estimate of current gas and bacon prices is simply a lie.

People are voting with their stomachs, which means that when they go to the supermarket they pay 50, 60, 70 percent more for food than they did a couple of years ago.

Look what happened to energy; look what happened not only to their cars, where gas went from $1.87 — we had times where it was below that — but it went from $1.87 to five, six, seven dollars.”

Along with Musk, Trump also spoke about those who have been hit by inflation and again revealed his strange interest in bacon prices.

We have to get the prices down, you know, when I see bacon costing five, four, five times more than it did a few years ago, when you look at some of the food products and groceries people can’t believe it, they used to be able to buy a whole cartful of them and today you know a lot of people just don’t have the money, they come in and they can’t buy anything, they look, yeah it’s a fixed price shock, they call it a fixed price shock.”

The chart below shows the real increase in US price levels (CPI), gasoline and bacon. Memo to Donald Trump: stop talking about bacon, you are out of style on the cured meat front.

What I’ve read and watched

• Barry Eichengreen, an economics professor at the University of California, Berkeley, wrote an opinion piece urging the stock market to calm down and not overreact to recent data. He expects the Fed to be unconcerned with previous guidance.

• Soumaya Keynes was speaking to Catherine Mann, an external member of the Bank of England’s Monetary Policy Committee, last week for her Economics Show podcast. Mann is still concerned that the resistance of real wages will keep inflation too high in the UK for too long

• Ahead of Kamala Harris’s economic policy launch this week, I looked at Biden’s record on the economy compared to Donald Trump. Inflation will be a major hurdle to overcome, and Harris may be wise not to build a campaign on Biden’s economic record.

• Unhedged asked what has changed in the US economy in the past week. It concluded that increased volatility puts the Fed in a difficult position: either the market forces it to cut more than it wants, or it refuses and markets go berserk.

• If you want the full two hours of Trump, here’s the YouTube link. If, like me, you want to search for a specific topic, I use TacTiq to generate a transcript.

A graph that counts

Forward interest rate markets have not gotten the message from the stock market that the initial panic reaction to weaker-than-expected U.S. employment data was overblown. Traders expect the Fed to cut interest rates by 1 percentage point by the end of the year and follow up with another 1 percentage point cut in 2025.

For a relatively normal mistake on jobs and unemployment, these are big bets. They assume the Fed now sees the economy completely differently than it did a month ago.