Gerard Baker's column on Tuesday, Oct. 13 starts with a puzzle. The numbers say the economy is in better shape than it was in June 2022. People rate it worse anyway. He's the Journal's editor at large, and he answers with a stack of figures. We'll leave his politics on the page and keep the math.
Here's June 2022, by his count. Consumer prices were up 9.1% from a year earlier, the worst in 40 years. Real hourly pay had fallen 4.1% since January 2021. The 30-year mortgage had nearly doubled, from 2.65% to 5.1%. Gas had gone from $2.39 a gallon to more than $5. Unemployment was 3.6%, the one bright spot. In Quinnipiac's poll that month, 33% approved of the president's handling of the economy.
Now the same list. Inflation is 3.4%. Gas is around $5 again, up about 65% since Inauguration Day. Mortgage rates are at 7%. Growth ran above 2.4% a year in the first half, and the Atlanta Fed puts the third quarter at 3.6%. Real wages are up. The S&P 500 is up about 35% on his measure. Unemployment is 4.1%. And the latest Quinnipiac poll has approval on the economy at 31%, two points lower than in June 2022.
The index and the receipt
Arthur Okun built the misery index in the 1960s. You add the inflation rate to the unemployment rate. It read 12.7 in June 2022 and reads 7.5 now. Baker adds gas, diesel and mortgage rates to make a bigger version. That one reads 29 then and 25 now. Either way, the gauge says things got better.
His first explanation for the mood is the one we'd give. People don't live on the inflation rate. They live on prices. Prices are 25% higher than in 2020, he writes, after decades when they barely moved. A slower climb this year doesn't hand any of that back. The grocery total is still a quarter higher than it was. He also notes that core inflation, prices minus food and energy, rose 2.4% in the year to August, down from 3.3%. That's a yearly figure. Our own test for new money uses the monthly one, and Part 2 of this week's Daily has it.
Our read
This is Cash Flow (M5), with a dose of Behavioral. The lesson is about levels and rates. A rate is how fast prices climb. A level is where they sit. Headlines and the Fed talk about rates. Your checking account pays levels. When inflation slows from 9.1% to 3.4%, the climb gets gentler. Nothing comes back down. A budget written in 2020 needs about a quarter more to fill the same cart today, by Baker's 25% figure. That's the gap between the data and the mood, and the mood is right about the household part.
Here's the piece of your plan this touches. Your emergency fund has a target number on it. Most people set that number once and never touch it again. If you set yours in 2020 or 2021, it buys about a fifth less than it did, by Baker's count. The check this week takes ten minutes. Pull up the fund's balance, add 25% to the old target, and see how far you are from the new line. Do the same for the monthly spending figure in your retirement plan. If the new line looks far off, that's a conversation for a review. You don't size the umbrella to last spring's rain.