Paul Krugman writes today that he was wrong about inflation. Fair enough. But suppose, just for the sake of conversation, that inflation goes like this over the next year or so:
This is not a projection or even a guess. Just a possibility. But if the core PCE index—the Fed's favorite!—follows the dashed line or something close to it over the coming year, what will be our conclusion about inflation? That the hawks were right? Or that Team Transitory was right, but "transitory" turned out to be a little longer than they thought?
For the record, I think Team Transitory figured that inflation would come down by the end of 2021. At this point, it looks like either (a) they were utterly, catastrophically wrong, or (b) they were about a year too optimistic. I would like everyone on either side of this debate to tell us where they stand now. For the record, I'm on Team "We Were a Wee Bit Too Optimistic."
I think the scenario you outlined is quite plausible. But if that scenario plays out, it will be after the Fed raised short-term interest rates from near 0% to at least 2.5% and probably north of 3%. That doesn't mean Team Transitory was basically correct but just a wee bit too optimistic - that means that significant changes in monetary policy were needed to bring inflation back under control.
Like you, I was also on Team Transitory. But we were wrong! The Fed's actions have been necessary (and I hope we are getting close to sufficient) to whip inflation - but Team Transitory's whole point was that we shouldn't raise rates because inflation would go away on its own. It has not gone away on its own!
It wasn't so much a question of whether the Federal Reserve would raise interest rates, but of how much.
Or it is going away. Lags lags.
I’m keen to know the mechanism by which raising the federal funds rate increases the world supply of petroleum and/or wheat, or fixes the delays in shipping and transport.
The big economic summit in Davos Switzerland was about three months ago. All the big corporate honchos and billionaires were there hobnobbing and guess what?
Three months later BOOM uncontrollable inflation. Go figure, Krugman doesn't.
Well except real June inflation didn't make sense. Badly made data is poor data. It must be corrected.
John, your comment will ECHO thru HISTORY.
This still feels a lot like oil prices working their way through the rest of the economy plus some gouging by those in a position to gouge. Certainly no “wage-price spiral” without the wage component. I give it 6 months.
+1
I agree - six months and core PCI is at 3% maybe 2.5%.
Counterpoint: if the stock market has actually begun a big-ass bounce back (it might have) and Russia keeps the war flaring (US isn’t helping by sending weapons IMO)… it could still be high in January.
I don’t think so though.
There have always been definite causes of high inflation - it's not a matter of an "overheated" economy spontaneously causing inflation. The main cause of inflation episodes in history has been wars In war times there is wage pressure, as men are withdrawn for the military, and governments spend a lot. The cause of the 1975 and 1980 spikes was oil price. It was not excess wage demands - wages fell far behind inflation at that time. When the causes came to an end, so did inflation.
This time there are also certain causes - stimulus money, supply bottlenecks, oil price again. If and when those things subside inflation will also. If the stimulus money has not gone by now it will be gone soon, and the supply problems will get worked out. This is an emergency for corporations since they are losing profits by not having enough to sell. Wages have essentially nothing to do with it - as Kevin often shows, they are not keeping up with inflation.
The Fed failed to prevent inflation in the 70's and 80's, so there is no reason to think it can reverse inflation this time.
How did the stimulus money contribute to inflation in Europe?
Only Democ--... America has agency.
On this the GQP parents & their BLUE MAGA #OurRevolution children agree.
If energy and food remain high and due to war a climate they will, its not going down. I know you don't like using those but its the same shit as assume a can opener. We still have to pay those prices.
If they stay the same, then the rate of inflation goes down as prices stay high and people adjust to the "new normal".
The war will eventually end, though it will go on longer than any thought possible.
Climate change--yeah, that will lead to long term food issues and droughts lead to migration, turmoil, etc. This new normal is not something we'll adjust to easily. Right now, this year is still being treated as an anomaly. I fear it is not.
I have to repeat golack and myself again (and again, and … ): inflation is a RATE OF CHANGE, NOT a level. It is the rate of increase of a broadly-based price index, such as CPI or PCE. No increase, no inflation.
Tbf it reads (and his related twitter history) like he's still on team "We Were a Wee Bit Too Optimistic", and is trying to work through where the overly optimistic part of his assumptions came from.
Markets staying crazy longer than you staying solvent...
I'm on team wee bit optimistic, too. Inflation will follow Kevin's graph.
Krugman is wrong about him being wrong. Unless he can explain how the U.S. stimulus created inflation around the world.
A variety of one-time factors that had nothing to do with economic policy created the inflation we've been having. Maybe various coincidental one-time factors will continue. But more likely, they will recede, but the Fed will still succeed in driving the economy into a recession because capitalism can't survive when unemployment is low enough to require paying workers a higher wage.
Nope.
Agree with your first couple of points; but disagree with the last. Regulated, strong-unions capitalism worked ok* until the 1980’s, when we started electing laissez-faire believers.
*Granted, ‘worked ok’ meant ‘worked ok for white men’. But there’s no reason it couldn’t have worked for everybody.
I'm on Team I-Was-Too-Optimistic-But-It's-Putin's-Fault.
Also, something will have gone wrong if inflation goes down to zero. I don't know who wants that, but the Fed doesn't.
Team exogenous shock in an otherwise NAIRU economy on a long-run Philips Curve that has been misinterpreted because people refuse to see how nominal data resolves contradictions that result from exogenous shocks.
The future is unknowable. All sorts of events could affect inflation -- both globally and domestically -- that we can see and can't see, uncontrollable insofar that central bank's actions cannot address the specific problems causing inflation, though it could curb the effects.
Pandemics The unresolved SARS-CoV-2 pandemic could rage back with an unexpected antigenic shift that devastates infected populations triggering widespread, near-total lockdowns.
Climate We could have an 0.001% adverse climate event that kills thousands in a week and shut down parts of the economy by virtue of collapsed infrastructure that requires time-consuming repairs and a massive loss of productive labor (dead people).
Terrorism We could have a 9/11 event that results in certain national infrastructure or supply chains frozen.
War Russia could trigger a global (or near-global) war. China and North Korea could be contributing factors to its global spread, resulting in the deglobalization of trade / the push for autarky in the US and elsewhere.
Political violence A successful assassination triggering widespread political violence (the conspiracy dreams of far-gone conservative extremists) devolving the nation into chaos with supply chains split along geo-political factions.
Absent these types of exogenous events (as opposed to Econ 101 black swans), inflation should be going down rapidly. The point isn't to make light of the notion of exogenous events re economic conditions, but to state the fact that, as much as anyone would like to know the future, it is unknowable. No one knew that Russia would launch a war or that Ukraine would be capable of withstanding it. Absent the war or Ukraine's solid resistance, we wouldn't have the headline inflation we see today.
It's tough enough to predict the economy 1 year from now, but it's impossible to predict exogenous events that can have devastating effects on economies. But if you look at where we were before the pandemic and the war, we were on very solid, stable footing, economically-speaking.
That we could have NAIRU at unemployment below 4% was implausible for most, but the current inflation we're seeing is *not* a result of low unemployment. Ergo, I believe firmly that, once removed from the equation, there is nothing standing in the way of NAIRU below 4% unemployment.
I've always been on team "hope for the best, prepare for the worst". I was unconvinced by Biden's explanations, because he's a politician and it's in his favor to spin things his way. OTOH, stimulus aside and oil leases aside, there's really little impact a president really has on these things. Better to say this bubble has been building for some time, and only now has it burst.
I'm on Team right, because noneconomic factors (read: political) figured into the mix as well.
This bothered me as soon as I finished writing it, but of course I can't edit so: Technically, technically, trying to increase the inflation rate to lower the other party's turnout in an election cycle is an exogenous shock. But, is there a difference in kind of exogenous shock? Because after all, Russia's Ukraine invasion wasn't about rewinning Congress in 2022 is one thing; deliberately increasing the inflation rate quite another. How could you even factor the latter into an economic forecast?
I have thought about this long and hard and having done so I can categorically State that I’m glad tomorrow is cat blogging. ( see what I did there?)
Notice the huge build in gasoline. They have been skimming. Fraud is fraud.
Gas prices and corporate profit taking put a fire under inflation.
Why don't we ever report corporate profits in comparison to inflation?
I'm not qualified to put forth an opinion on this, and, like many Americans, I don't think anyone cares what I think anyway. But my guess is that if high inflation works out well for the Republicans in this years midterms, they will see if they can keep it going as long as possible, in hopes it will help them in the 2024 election. I know they are not the boss of the economy, but since most predictions point to a GOP win in November, I am joining Team This-Is-Not-Over-By-A-Long-Shot.
C) We’ll find that picking the starting point for a trend line makes all the difference.
Yep.
If you pick mid-2020/early-2021 as the starting point, it sure looks like inflation is rising to about 4%. Which is about what it "feels" like, and probably about what it actually is and will be for a while yet.