Some economists giving the Fed credit for lower inflation have been making a different argument, which I think of as “contactless” monetary policy — the claim that monetary tightening can directly reduce inflation, without having to cause unemployment along the way. For example, Ricardo Reis of the London School of Economics argues that while inflation-reducing rate hikes may sometimes lead to higher unemployment, “that is a side effect, not the causal channel.”

This argument provoked an acerbic response from Olivier Blanchard of the Peterson Institute for International Economics, who, you should know, isn’t just one of the world’s most respected macroeconomists but also normally a very even-tempered kind of guy. But he recently stated on X, the platform formerly known as Twitter, “Short of a direct effect on inflation expectations, or mind control, or price/wage controls, this requires slowing down the economy, and thus increasing unemployment. To me, the increase in unemployment is causal, and needed to reduce inflation.”

I’m with Blanchard here. It’s always important to remember that economics is about what people do and that when you make an argument about the effects of economic policy, you should have at least some plausible story about how the policy affects the behaviour of specific people.

In this context, I find it especially helpful to focus on small businesses, not out of any special affection for the little guys but because (a) we have regular surveys of small-business perceptions and intentions from the National Federation of Independent Business, and (b) we can be reasonably sure that small-business owners aren’t watching Fed press conferences and carefully parsing Jerome Powell’s words to guide their pricing decisions.

Now, the NFIB survey doesn’t directly ask respondents about the rate of inflation. Instead, it asks whether they are increasing or reducing prices and reports the resulting “diffusion index,” the difference in number between those increasing and those reducing. Such diffusion indexes tend, however, to track economic data quite well.

The NFIB survey looks a lot like official inflation data: It shows a sharp rise in 2021-22, then a steep fall that has brought us most, but not quite all, of the way back to pre-pandemic inflation.

So how can we give credit to the Fed for disinflation when the mechanism through which monetary policy is supposed to reduce inflation doesn’t seem to be operating?

This result is useful for several reasons. One is that it serves as a rebuttal to inflation truthers who claim that the government is faking the price numbers; yes, they’re back. But there’s a private survey that tells the same story as the government numbers. (And for what it’s worth, small-business owners lean Republican.)

Another reason is, as I’ve already pointed out, small businesses are unlikely to be parsing Fed statements and making pricing decisions based on their perceptions of Fed credibility.

And if you reject contactless disinflation but believe, nonetheless, that the Fed is driving inflation down by weakening the economy, albeit in ways that aren’t showing in official data, well, that weakness isn’t showing in business perceptions, either. Here’s how the NFIB puts it:

Waiting for Gadot: The long anticipated, predicted, recession is nowhere to be seen (almost). Recessions can start quickly (2020 shutdown) and end quickly (2020 reopening). Or they can start slowly, for example, due to opposing forces like expansionary fiscal policy vs. contractionary monetary policy. The Fed staff (not F.O.M.C.) has changed their recession forecast to a “slowdown.” There is more talk about a “soft landing” and less of a recession. The shifting outlook is often confusing but even less clear is, can the Fed reach its 2 per cent inflation target (P.C.E. deflator) without a significant slowdown in economic activity (e.g., slower wage cost growth)? The manufacturing sector is clearly slowing, soft all year (I.S.M.) but services are doing well (I.S.M.). Business investment is solid (lots of government incentives), and housing is ignoring 7 per cent mortgage rates.”

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OK, I don’t think businesses are waiting for Wonder Woman. But typo aside, this really doesn’t sound like an economy in which businesses are forgoing price hikes because of weak demand, in such a way that we’re currently sliding down the steep part of the Phillips curve. It sounds like an economy in which inflation is coming down because of improved supply, not reduced demand.

Does this mean that the Fed was wrong to raise rates? Not necessarily. If it hadn’t raised rates, the economy might be running really, really hot. The Atlanta Fed’s GDPNow tracker currently shows the economy growing at 5.8 per cent (!!!), which isn’t really plausible but does suggest a lot of heat; so the Fed may not have caused disinflation, but rate hikes may have been necessary to permit disinflation caused by other forces. Or, if you like, the Fed may have done the right thing for the wrong reasons.

In any case, I’d urge economists to look up from their models now and then and remember that they’re talking about people. Oh, and let’s celebrate the good inflation news, whoever we think should get the credit.

This article originally appeared in The New York Times.

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