Is inflation actually lower than we think? This economist says yes.

By Brett Arends

New York Fed says inflation and import prices are overstated

President Trump, insisting that "there is no inflation," has been trying to force the Fed to slash short-term interest rates to 1% or even lower.

The New York Federal Reserve has just published a report that should be music to President Donald Trump's ears.

True inflation really is lower than the official figures say, and the inflationary effect of rising import prices is significantly overstated, according to bank economist Danial Lashkari.

His analysis, based on a peer-reviewed paper he recently co-authored, is potentially politically explosive. It gives ammunition to the president in his campaign against Federal Reserve Chair Jerome Powell.

Trump, insisting that "there is no inflation," has been trying to force the Fed to slash short-term interest rates to 1% or even lower. Powell and a majority of the Fed's board, arguing that inflation remains a threat, held those rates at a range of 4.25% to 4.5% until September. The Fed has since cut them to 3.5% to 3.75%.

Powell has cited Trump's sweeping new tariff regime as an inflationary risk. Trump says the taxes won't raise prices.

Trump has escalated his campaign against Powell to include verbal abuse and threats. Most recently, the Trump administration's Justice Department launched a criminal investigation into Powell, although the president says he was not involved.

Since last summer Trump has also been trying to fire Lisa Cook - another Fed governor worried about inflation - citing alleged malfeasance uncovered by one of his cabinet secretaries.

Lashkari's argument is technical. In effect, he argues that the official inflation figures overstate inflation, especially on manufactured and high-tech products, because they don't adjust the raw prices enough to account for quality improvements.

And his arguments aren't specifically about the current moment or the hikes in import prices introduced by Trump last year. Rather, Lashkari says these miscalculations mean the inflation rate has been overstated for decades.

Not everyone is convinced. "The argument doesn't hold water, in my view," says Joachim Klement, economist and strategist at Panmure Liberum, who believes the argument's assumptions about consumer behavior are too narrow and flawed.

Employment figures are a matter of fact, but inflation figures are a matter of opinion. This is why the calculations of the official inflation figures are so sensitive - and so vulnerable to manipulation.

Last summer the president fired the economist in charge of the Bureau of Labor Statistics, which compiles the official employment and inflation data, and tried to replace her with an economist from the Heritage Foundation, a conservative think tank. He dropped the attempt, apparently after resistance from Senate Republicans.

But in politics it's not what's true that really counts, just what people believe. And Lashkari's arguments can help the president and his allies at the Fed in their campaign to play down any inflationary effect of tariffs, question the current inflation figures and slash short-term interest rates.

Inflation and interest rates are especially critical to retirees and others who live off investment income. Inflation erodes the purchasing power of your savings, while interest rates can determine the income you get. Inflation also undermines the value of Social Security payments, because the annual cost-of-living adjustments come a year in arrears.

How and where this fight will end is anyone's guess. But the chances are that the bond market, as usual, will be the final judge.

-Brett Arends

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