Elon Musk says we should start worrying about deflation, even though prices are still growing at a four-decade high
- Elon Musk called on the Fed to cut interest rates on Wednesday, citing fears of deflation.
- Musk's tweet comes one week before the Fed is expected to raise rates aggressively to fight inflation.
The world's richest man is concerned about things getting cheaper.
Elon Musk suggested in a Wednesday tweet that the Federal Reserve should give up its fight against inflation and instead pivot to worry about deflation, otherwise known as declining prices. The Tesla CEO called on the central bank to cut interest rates by a quarter of a percentage point — "drop 0.25%" in his words — after saying earlier in September that "a major Fed rate hike risks deflation."
Musk's 0.25% suggestion was in response to tweets from Cathie Wood, the CEO of investment firm Ark Invest. Wood noted that prices of several key commodities like lumber, oil, and copper have plummeted from their early 2022 peaks over the past few months.
Impending deflation "is neither subtle nor secret," Musk added in another Wednesday tweet replying to Wood.
Musk's call stands in stark contrast to the current economic backdrop. Inflation data published Tuesday showed prices still climbing 8.3% in the year through August. While that shows a modest slowdown in the annual inflation rate from July, it remains among the fastest year-over-year paces since the 1980s and above the 8.1% gain expected by economists.
Prices also rose 0.1% through last month alone, accelerating from July's flat month-over-month reading and hinting inflation will be tougher to cool than previously expected. While gasoline prices have fallen significantly and weighed on overall inflation, the cost of food, shelter, and other utilities are still climbing at a faster-than-usual pace. There are few signs the US is anywhere near a major deflationary episode.
The Tesla CEO's tweet also opposes the Fed's most likely rate decision. Markets and economists largely expect policymakers to raise interest rates by three-quarters of a percentage point when they meet on September 21, marking the third consecutive hike of that size. Fed Chair Jerome Powell signaled in August 26 remarks that the central bank is nowhere near done with lifting rates, and that the Fed "must keep at it until the job is done."
While near-term deflation may be unlikely, massive rate hikes still pose some serious risks.
Rising interest rates combat inflation by encouraging companies to cut expenses, but it's often at the cost of jobs. That means a wave of layoffs across industries is likely in the near future, with the Fed warning in recent weeks that they feel a certain level of unemployment will be necessary to curb inflation.
"These are the unfortunate costs of reducing inflation," Powell said in a speech at the Fed's economic symposium this year. "But a failure to restore price stability would mean far greater pain."
In a dire paper published by Brookings Institution this month, researchers found that Fed will need to push the unemployment rate "far higher" than the central bank's stated prediction of 4.1% in 2024 in order to bring inflation down to its 2% target. Using the Brookings data, Jason Furman, former chairman of the White House Council of Economic Advisers under President Obama, estimated that unemployment would need to hit at least 6.5% to bring inflation down that much.
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