Should We Be Seeing Red Over the Red Sea?

There are many reasons to be horrified about recent events in the Middle East, and the prospect that attacks on shipping might undermine progress against inflation is way, way down the list. Nonetheless, if you are trying to forecast inflation, disruption of a major choke point for global commerce — the Red Sea is how ships get to and from the Suez Canal — isn’t what you want to see. But how big a deal is it?

Well, it’s not trivial. But while supply problems in general were a major factor in the 2021-22 surge in inflation, and the resolution of those issues is the main story behind recent disinflation, it’s important not to get too physical. The pileup of ships waiting outside the ports of Los Angeles in early 2022 was a conspicuous and highly visible cause of inflation, but it was less important than more diffuse, relatively intangible factors like the way the pandemic and its aftermath disrupted labor markets. Since there’s no reason to expect these more diffuse problems to return, the inflation impact of the conflict with the Houthis and its effect on Red Sea shipping will be limited.

But before I get there, a word about where inflation stands now. Since last week’s report on the Consumer Price Index, I’ve had several conversations with friends who believe, probably based on what they’ve heard from talking heads on cable TV, that inflation is stuck at a relatively high level. Indeed, the core C.P.I., which excludes food and energy, is up 3.9 percent over the past year.

But anyone citing that number as evidence of stubborn inflation is deeply misinformed. Indeed, if he or she is in the business of giving financial advice, harping on 3.9 percent amounts to professional malpractice.

To see why, let me give you a few more numbers:

• Core C.P.I., past 12 months: 3.9 percent

• Core C.P.I., past six months (annualized): 3.2 percent

• Core H.I.C.P., past 12 months: 1.9 percent

• Market expectations for 2024 inflation: 2.2 percent

So, when people talk about 3.9 percent inflation over the past year, they’re averaging 4.6 percent inflation in the first half and 3.2 in the second half — that is, they’re very far behind the curve. Furthermore, a lot of that inflation reflects official estimates of shelter costs, especially an estimate of what homeowners would be paying if they were renters, which lag far behind market rents.

The Harmonized Index of Consumer Prices, which doesn’t include this imputed number — and is the way Europe measures inflation — has already declined to the Federal Reserve’s target of 2 percent, showing that misleading estimates of shelter costs are the source of any perception of stubborn inflation. And markets know that: Recent market behavior implies a belief in what the data really shows us, which is that inflation is already under control.