On Inflation, Could We Be Through the Worst?

Happy Monday! On this day in 2002, House Democrats voted 177-29 to make some congresswoman from California the leader of their caucus. 

Twenty years later, Nancy Pelosi is mulling whether to stick around for another term or cede the role to a younger member.

Quick Hits: Today’s Top Stories

• Election results—and concessions—continued to roll in over the weekend, with just a few key races still too close to call.
• Democrats will maintain control of the Senate, regardless of what happens in the Georgia runoff between Sen. Raphael Warnock and Herschel Walker next month. In Nevada, incumbent Sen. Catherine Cortez Masto, a Democrat, is projected to eke out a narrow win over Republican challenger Adam Laxalt, securing 48.8 percent of the vote to Laxalt’s 48.1 percent with more than 95 percent of the vote counted. Laxalt has not yet conceded the race, but acknowledged Saturday his campaign’s “victory window” was narrowing and Cortez Masto could “overtake” him. In Arizona, incumbent Democrat Sen. Mark Kelly is projected to defeat Republican challenger Blake Masters, securing 51.6 percent of the vote to Masters’ 46.3 percent with 93 percent of the vote counted. Masters declined to concede the race until “every legal vote is counted,” but said he would “congratulate [Kelly] on a hard-fought victory” if the incumbent received more support at the end of the process.

• Republicans are likely—but not guaranteed—to retake control of the House, and would have a narrow margin if they do. Network decision desks have called 212 races for Republicans and 204 for Democrats, leaving 19 seats still up for grabs—primarily in California, Arizona, and Colorado. NBC News projects Republicans will end up with a 219-216 majority. In Washington, Joe Kent—a far-right military veteran endorsed by former President Donald Trump who defeated GOP Rep. Jaime Herrera Beutler in the August primary—is projected to lose the state’s 3rd congressional district to Democrat Marie Gluesenkamp Perez. Kent has thus far refused to concede. In Oregon, Republican challenger Lori Chavez-DeRemer is projected to knock off Democratic candidate* Jamie McLeod-Skinner in the 5th congressional district.
• In the contest for governor in Nevada, Republican challenger Joe Lombardo*—a Trump-endorsed sheriff who rejected claims the 2020 election was stolen—is projected to defeat Gov. Steve Sisolak, who conceded the race. In Arizona, the race between Democratic Secretary of State Katie Hobbs and Republican Kari Lake remains too close to call, with Hobbs up 50.5 percent to 49.5 percent and 93 percent of the vote counted.

• Nearly every Trump-endorsed or MAGA-styled secretary of state candidate—each of whom made claims the 2020 election was stolen central to their campaign—lost his or her race this week. In Arizona, Adrian Fontes, the Democratic candidate, is projected to defeat his Republican opponent, Mark Finchem. In Nevada, Democrat Francisco Aguilar is projected to defeat Republican Jim Marchant. In New Mexico, Maggie Toulouse Oliver, the Democratic incumbent, is projected to defeat her Republican opponent, Audrey Trujillo. In Michigan, Jocelyn Benson, the Democratic incumbent, is projected to easily hold off Republican challenger Kristina Karamo. And in Minnesota, Steve Simon, the Democratic incumbent, is projected to defeat Republican candidate Kim Crockett.
• An exception to the trend: In Indiana, Diego Morales, the Republican candidate for secretary of state, is projected to defeat his Democratic opponent, Destiny Wells. Morales—a former aide to Mike Pence—expressed doubts about the accuracy of the 2020 election results last year, but didn’t campaign much on it.
• The University of Virginia remains on lockdown this morning after a student gunman allegedly killed three people on campus Sunday evening and injured two others. A statement by UVA president Jim Ryan identified the alleged shooter, who is still at large, and “is considered armed and dangerous.” 
• Ukrainian troops liberated the key southern city of Kherson Friday after Russia’s defense ministry said it had withdrawn all its troops from the city to the opposite bank of the Dnipro River. Ukrainian President Volodymyr Zelensky said Saturday that Russian forces had destroyed key infrastructure and left mines and trip wires before withdrawing and called on any Russian soldiers hiding in the region to surrender.
• A bombing Sunday afternoon on a busy pedestrian street in Istanbul killed at least six people and wounded 81 others in what Turkish Vice President Fuat Oktay said was an act of terrorism, though no group immediately claimed responsibility. Justice Minister Bekir Bozdağ said security officials were investigating a woman seen on security footage leaving a package on a bench shortly before the explosion, and Interior Minister Süleyman Soylu said police had arrested a suspect. The attack was the first in Turkey in recent years after a string of bombings and shootings by the Islamic State from 2015 to 2017.
• The White House announced Saturday President Joe Biden had accepted the resignation of Customs and Border Protection (CBP) Commissioner Chris Magnus, making Troy Miller—Magnus’ deputy—the acting head of the agency. Politico reported Friday that Magnus had “lost the confidence of his bosses,” and would have been fired if he refused to resign.
• The Chinese Communist Party began inching away from its restrictive “zero-COVID” policy over the weekend, shortening the mandatory quarantine period for international travelers and close contacts of positive COVID-19 cases from seven days to five—plus three additional days of home isolation. The tweaks—which the government labeled a refinement rather than a relaxation—also include the end of mass testing (in most areas) and recategorizing certain high-risk areas. 

On Inflation, It’s All Relative

Taken on its own, last Thursday’s inflation data is painful to read. The Consumer Price Index (CPI) was up 7.7 percent in October relative to October 2021, and up 0.4 percent compared to September—a 4.8 percent annual rate if extrapolated across 12 months. Even stripping volatile food and energy prices from the index, so-called “core” inflation climbed 0.3 percent month-over-month—a 3.6 annual rate. By any measure—the Federal Reserve prefers the PCE Price Index—the economy is still running far hotter than policymakers’ 2 percent annual inflation target.

That said, 7.7 percent sounds pretty nice compared to what came before. Prices in June were up 9.1 percent year-over-year—a 40-year high—and September’s CPI report showed 8.2 percent inflation over September 2021. Coming in under economists’ expectations of 7.9 percent, Thursday’s report provided hope that the Fed’s march toward higher interest rates could slow, softening any coming economic downturn. Some goods—beef and chicken, fruits and vegetables, clothing, furniture, airfare, used cars—even saw deflation, with prices lower in October than when they were measured a month earlier.

Investors had been waiting for a report like this, and they celebrated upon its arrival. The S&P 500 closed up more than 5 percent on Thursday, while the tech-heavy Nasdaq Composite leapt 7.3 percent. Those jumps were the indices’ best days since April and March 2020, respectively. “This is a very encouraging inflation report,” wrote Justin Wolfers, an economics professor at the University of Michigan. “There’s a good chance that inflation has peaked, and is now turning down.”

But there are a lot of numbers between 2 percent and 7.7 percent, as economist Jason Furman noted, and there were plenty of blemishes in Thursday’s data.  

Gas prices ticked up 4 percent again in October, and the cost of plenty of groceries—flour, eggs, deli meat, alcohol, coffee—continued to rise at an accelerated pace. “This morning’s CPI data were a welcome relief, but there is still a long way to go,” Lorie Logan, Dallas Federal Reserve president, said in a speech Thursday. Treasury Secretary Janet Yellen also warned against over-interpreting the numbers. “That is one data point,” she told Reuters Friday. “I don’t know if this is a turning point.”

Others were similarly cautious, remembering inflation tempered slightly in July only to come roaring back in the fall. “We saw an absence of bad news,” said Wendy Edelberg, a senior fellow of economic studies at the Brookings Institution. “This is the bare minimum for what we need to see to get inflation under control.”

Last week’s report featured some statistical quirks that bear monitoring, in both the positive and negative directions. We noted last month the CPI’s measure of housing prices was likely exaggerated, and the same held true in October. Shelter costs account for nearly a third of the entire CPI calculation, and Thursday’s data showed them increasing last month at nearly a 10 percent annual clip. Yet as just about any online rental company will tell you—Rent.com, Redfin, Apartments.com—the market is cooling, and cooling precipitously. Because CPI is calculated on a six-month rolling average, however, that cooling won’t be reflected in the official government data until early 2023.

Pushing in the other direction, though at a much smaller scale, is a technicality in how the CPI measures the cost of health insurance, which, until this month, has been a significant driver of inflation. As Gwynn Guilford reported for the Wall Street Journal a few weeks ago: 

The Labor Department bases the price of health insurance in large part on health-insurer profits, which are reported with a lag of about 10 months. Thus, data in the October 2022 CPI reflect what happened in 2021.

This lag is currently amplifying big swings in medical-care spending. In 2020, lockdowns, limited healthcare capacity and consumer reluctance to seek care translated to lower healthcare spending and thus reduced benefits paid by insurers and commensurately increased net premium income. That showed up as skyrocketing health-insurance prices starting in October 2021, when the 2020 data were incorporated.

This year’s updated data are based on 2021, when consumers caught up on preventive care and elective procedures, eating into insurers’ premium income, which should translate to a drop in health-insurance prices in the CPI.

Fed Chair Jerome Powell doesn’t seem to be letting short-term fluctuations one way or the other divert the central bank from its path, making clear earlier this month that the central bank’s inflation fight isn’t over. “Our decisions will depend on the totality of incoming data and their implications for the outlook for economic activity and inflation,” he said. “We still have some ways to go, and incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected.”

Thursday’s data won’t change that general approach, though it may leave room for the Fed to ease up slightly. Per futures traders, the odds of a fifth consecutive 75-basis-point interest rate hike at the central bank’s next meeting in December have been cut in half since Thursday, with a smaller—but nevertheless significant—50-basis-point hike now the likeliest outcome. 

Still, officials are signaling their tightening cycle is far from complete. “Inflation has consistently proven to be more persistent than expected, and there are significant costs of continued high inflation,” Loretta Mester, head of the Cleveland Fed, said Thursday. “I currently view the larger risks as coming from tightening too little.”

“This next phase of policymaking is much more difficult because you have to be mindful of so many things,” San Francisco Fed President Mary Daly told the Financial Times. “You have to be mindful of the cumulative tightening that’s already in the system. You have to be mindful of the lags in monetary policy. You have to be mindful of the risks that are all throughout the global economy and the tremendous uncertainty that we have even about what the evolution of inflation is going to be.”

Worth Your Time

• Friday marked both Veterans Day and, as Steele Brand points out in Law & Liberty, the feast of St. Martin of Tours, who served in the Roman military before serving the poor. “Being patriotic on a day like November 11 must mean more than strong words or flag-waving with no actions or commitments,” he writes. “Martin knew this better than anyone. By serving his country, he earned the position of standing up to that country when it tested the limits of service. He then used military discipline and martial courage to fight for people’s souls and defend justice for average people. If we view Veterans Day as merely an opportunity to honor those who have fought in wars, then we miss the deeper meaning of November 11. We miss the insights of soldiers like Wilfred [Owen] and Martin and the greater objectives of seeking peace, practicing charity, and protecting human dignity. The soldier who fights for these things will never be engaged in a futile cause. The veteran who remembers them will know how to apply his martial skills in peacetime. The young citizen who admires them will be more willing when the recruiter comes to call.”
• When private investigator Michael McKeever was hired to track down a debtor who’d fled Dubai, surveilling his house in Brooklyn and photographing the people coming and going, he didn’t see anything unusual about the job. That is, until the FBI reached out with a warning: “Your client is not who you think they are.” Benjamin Weiser and William Rashbaum report for the New York Times that McKeever was being used in a suspected plot by Iranian intelligence agents to kidnap Iranian-American journalist Masih Alinejad, who has criticized Iran’s human rights record. “Across America, investigators are increasingly being hired by a new kind of client—authoritarian governments like Iran and China attempting to surveil, harass, threaten and even repatriate dissidents living lawfully in the United States,” the reporters write. The private investigators do street-level legwork at comparatively low cost and risk to these foreign governments. “Bruce Hoffman, a terrorism scholar at the Council on Foreign Relations, said a government can hire an investigator in a routine transaction to learn detailed information about a person’s residence, cellphones, Social Security number, work address—and feed that knowledge to a state security apparatus.”

Something Incredible

Presented Without Comment

Also Presented Without Comment

Also Also Presented Without Comment

Toeing the Company Line

• Will Rep. Kevin McCarthy agree to undercut his own power in order to secure support from the Freedom Caucus in his bid for the speaker’s gavel? Haley has all the details in Friday’s Uphill. “Whoever wants to be speaker of the House has no choice,” outgoing Rep. Mo Brooks told her. “They have to give the Freedom Caucus what the Freedom Caucus reasonably demands, or else the votes are not there to be elected speaker.”
• Competent Republicans won their elections last week, and incompetent Republicans didn’t. There’s a lesson to be learned there, Jonah writes in his latest G-File. “Winning is great, but if you don’t learn and adjust after a victory, you’ll eventually lose,” he writes. “On the other hand, if you don’t learn and adjust after losing, you’ll keep losing until you do.”
• “There is only one Republican in the country,” Nick writes, “who stands a plausible chance of defeating Donald Trump.” It’s Ron DeSantis. “He’s not my first choice. I tend not to support politicians who abuse state power to discriminate on the basis of political viewpoint,” he writes in Friday’s Boiling Frogs (🔒). “But I’m a realist.” 
• If last week’s elections are any indication, decency in politics isn’t dead yet. As David notes in Sunday’s French Press, most candidates who embraced the politics of anger and fear lost their races. “Even when times are hard, there are voters who are unwilling to call good evil and evil good,” David writes. “It turns out that it’s hard to escape the need to persuade and inspire.”
• Are humans by nature violent, selfish, and tribal—or something better? On the fifth episode of The Dispatch Book Club (🔒), Sarah is joined by Dutch thinker Rutger Bregman, author of Humankind: A Hopeful History, to discuss.
• On the site this weekend, Price explains what the heck happened to FTX—the major cryptocurrency exchange that declared bankruptcy last week—while Tyler MacQueen explores Steven Spielberg’s evolution from pop culture king to master historian. Plus: Jim Lafferty reviews the Japanese film Ikiru, inspired by a Leo Tolstoy novella.
• On the site today, Chris Stirewalt breaks down how candidate quality crushed the GOP’s congressional hopes this cycle, Harvest points out that most of the losing GOP candidates who ran on allegations of 2020 election fraud have nevertheless admitted defeat in 2022, and Giorgi Kandelaki writes about how the country of Georgia is “increasingly embracing its homegrown despot,” Joseph Stalin.

Let Us Know

Are you seeing any indications of slowing inflation in your own lives?

Corrections, November 14, 2022:  The Republican candidate for governor of Nevada is Joe Lombardo. Jamie McLeod-Skinner is the Democratic nominee for Oregon’s 5th House District, but not an incumbent.