Nobel laureate Paul Krugman says 'true' US inflation may have cooled to below 4% - and points to falling rental prices and slowing wage growth as proof


Theron Mohamed
Mon, November 7, 2022 

Paul Krugman.Arun Sharma/Hindustan Times via Getty Images

The rampant inflation that has roiled the US economy this year may be fading, Paul Krugman said.


The Nobel Prize-winning economist pointed to a cooling rental market and slowing wage growth.


Underlying inflation may have dropped as low as 3%, Krugman said.

Sliding rental prices and slowing wage growth suggest red-hot US inflation may be waning, Paul Krugman has said.

"More evidence of a rapidly cooling rental market," Krugman tweeted on Saturday. He was referring to Zumper's October National Rent Report, which found that national median rents for one- and two-bedroom units fell in 61 of the 100 largest US cities between September and October.

The Nobel Prize-winning economist proposed that core Consumer Price Index (CPI) inflation, which excludes food and energy prices, might be overestimating how quickly the cost of shelter is rising. While the index rose by 6% on an annualized basis over the past three months, its "true" level could be around 4%, he said.

"Combined with slowing wage growth, there's a good case that substantial disinflation is happening, but not captured (yet) by the standard measures," he added.

Headline US inflation surged to a 40-year high of 9.1% in June, and remained above 8% in September. Soaring prices have spurred the Federal Reserve to hike interest rates from near zero in March to a range of 3.75% to 4%, in an effort to drag inflation down to its 2% target. However, higher rates have driven down asset prices and raised the prospect of a painful recession.

Krugman flagged other evidence of a softening rental market at the end of October. He pointed to Apartment List's national rent index dropping 0.7% in October - the gauge's largest monthly drop since it launched in 2017. The index also dipped in September, marking only its second monthly decline since the start of 2021.

"More evidence that rental rates are rolling over," Krugman tweeted. "Latest data are consistent with market rent inflation back down to historical norms of ~3 percent, maybe lower.

"With a lag, this will translate into much lower core inflation as measured by the BLS," he added, referring to the Bureau of Labor Statistics.

The veteran economist and columnist has also suggested that US wage growth is slowing, reducing upward pressure on prices. For example, he highlighted the nonfarm-payroll data released on Friday, which showed average hourly earnings growth declined over the past three months.

"Smoothed wage growth is only a bit above pre pandemic level," he tweeted, adding that worker productivity also improved.

"Given what's happening to wages and productivity, I don't see any way to make the case, as some have, for underlying inflation of 6 or even 7 percent," he said. "This looks <4, possibly even as low as 3."

Krugman has previously warned the strong US dollar and higher rates will weigh on exports and housing demand, causing the US economy to contract. He's also cautioned the Fed may have gone too far with its hikes and put the economy in unnecessary danger.