I have finally figured something out. Paul Krugman posted a longish look at inflation yesterday in which he surveyed the evidence for the recent spike being either transitory or long-lasting. He is on Team Transitory, but admits that Team Persistent is looking good right now:
Even once the inflation numbers shot up, many economists — myself included — argued that the surge was likely to prove transitory. But at the very least it’s now clear that “transitory” inflation will last longer than most of us on that team expected....And credit where credit is due: So far, warnings about inflation have proved right, while Team Transitory’s predictions that inflation would quickly fade have been wrong.
And here is a chart showing the Consumer Price Index:
Apparently Team Transitory thought that the inflation spike would last only a few months, which is why they're starting to cave in to the inflation hawks. But that never occurred to me. I always assumed that "transitory" meant 9-12 months, which is why I continue to feel comfortable about inflation. I've been assuming all along that it would peak around the end of this year and then start declining around the end of the first quarter of 2022.
I didn't have any particular reason for thinking this, aside from the sheer size of the stimulus ($2.8 trillion, including the $900 billion passed in December of 2020). But it explains why I've been a little perplexed by the conversation around inflation. Krugman was thinking inflation should already have started to decline, so he's worried. I've been cheerfully thinking it wouldn't decline for another few months, so I'm still happy as a clam.
I don't know who's right, of course. But at least now I know where the disconnect is between me and the professional economists.
I concur with your assessment, but Krugman may be seeing worrisome trends in the data. I believe the inflation will last until we have Covid behind us. It should have been done with by now, but the pro-Covid faction, led by the former president, seems determined—at the cost of 100k+ lives—to keep it around.
I just read this from Brad DeLong:
He is in Camp Transitory, though taking longer than he thought. But then the realignment he describes above is going to take a while.
" I always assumed that "transitory" meant 9-12 months"
I agree, but not just because of the size of the stimulus, but the duration and more importantly the ongoing global supply chain and energy cost issues. I'm sure Krugman and other "team transitory" economists have actual models to back their predictions, but I can't understand why the timeframe would be expected to be just a few months.
"I always assumed that "transitory" meant 9-12 months, which is why I continue to feel comfortable about inflation. "
I would agree. But the reporting is framed by the election cycle and we will continue to read that increased prices are Biden's fault.
What happens during 2022's disinflation????
An economist here who generally agrees with Krugman and am still on Team Transitory. Actual GDP is still well below potential, and we're not catching up all that quickly. The rest of the world is also well below potential. The Fed fully understands the potential of inflation and I think is fully committed to making sure that it doesn't reappear. (I was an economist at the Fed in the early-mid '80's when the screws were put to inflation - and the economy at the same time.) All that points to Transitory, with supply shortages presumably being a temporary phenomenon and the drop in the labor force participation rate also appearing temporary - with one critical exception. The M/F participation rates (PR) for 25-54 have changed pretty similarly and are on their way back up, but the 55+ PR dropped percentage-wise much more and is definitely not rebounding. It looks like about 2+m people over 55 have left the labor force on a more-or-less permanent basis. That change may have reduced supply somewhat, but the big difference is that the supply shortages may be with us for longer than I would have guessed. Many shortages should be transitory, e.g. for PPEs, toilet paper, lumber, ... But some are worrying, computer chips being at the top of the list. U.S. manufacturers like Intel have not re-invested that heavily and appear to be following the same set of mistakes that the U.S. automakers made in the '70's and '80's. That reliance of foreign-made chips may have had the biggest impact in terms of supply shortages, and it's possible that supply shortage could linger beyond a few more months.
There's a good reason why macroeconomists focus on the demand side, very much following Keynes. (That doesn't mean neglect supply but do focus on demand.) Most shocks to the economy come from the demand side rather than the supply side. What we saw in March/April 2020 was definitely a supply side shock that continues to have ripple effects. For example, the airline industry dramatically downsized and hasn't been able to quickly ramp back up. But we haven't seen a major supply side shock since the OPEC oil embargo of the early 1970's. And we've never seen a supply side shock like this in anyone's lifetime.
Moral to the story? The press has pretty much bungled the story. Scare stories about inflation - based largely on anecdotal evidence and people's perceptions - may make great news, they really don't reflect the "mundanity" of the workings of the economy. A better way of looking at things is to introduce some perspective into the discussion. You've done that by adding a time frame of 9-12 months - which I think is quite reasonable. The other perspective is to ask not whether we'll have persistently higher inflation, but what's the probability that we'll have persistently higher inflation? Krugman, you and I all put that number relatively low. My expectation is up a bit, maybe 5-10% up from 4-7%. But it's still low. And your prior post about the market's perspective - I generally look at the spread between the 5 year Treasury rate and the 5 year TIPS rate - suggests that people betting real money in general concur with that perspective.
thanks
Rich, I totally agree with your reasoned thinking, and I recently read something about previous inflationary periods in my lifetime that supports this view. Of all the inflationary times we've lived through, the one most closely resembling this one is the immediate post-war period after WW2. Pent up demand, caused by both large dollar savings and the previous restriction on goods available for sale. Plus the need to restructure the production of goods after that prior restriction. Plus the reorientation of the psychology of consumers from extreme pessimism to a return to optimism. (Sounds familiar, doesn't it.)
So when you look at the inflation graph of the late 1940s, it looks like about two years of inflation following the end of the war, plus a long period of economic health, which essentially made the two years of inflation a minor annoyance, not a big enduring problem.
That's a good point. Hopefully we get a quicker supply side change this time around, which I also think is pretty reasonable.
Something I'm not seeing in any of the articles, discussions, or hand-wringing about inflation is the backwards looking perspective. We shut down the economy pretty much because we had to -- we would have had a lot more deaths and would have overwhelmed the hospital system more than we already did if we didn't do that. Doing that without any kind of stimulus aside from being horribly cruel probably would have led to a worse recession than we had.
So, we were trading future inflation for a less worse recession and more people staying home and fewer dying and less overwhelmed hospitals. But we kind of knew that was what we were doing. What were we supposed to do instead?
What was the optimal size of the stimulus package? Inflation we kind of have tools to deal with. Worst pandemic in a century? We were caught a bit off guard. What's the equitable trade between fewer points of inflation now for more deaths then?
GDP is not well below potential. Most likely upward revisions are coming.
I have a question about inflation!
Is it wingnuts? Is this a function of general social conservatism, worldwide, reacting to Trump and conspiracy theories and acting out in any way they can to cause general harm and dissatisfaction?
Doesn't even need to be a conscious thing on their parts, it's simply what they do.
I mean wingnuts in positions in company's where they're able to influence prices and inventories.
A winter Covid surge might just crush the restaurants again. What that does to inflation I have no idea. Fewer tourists and vacations? My sister just got a new deck and house repair / repaint. Building a deck in December in Ohio because they are still working through the back orders. My brother is renovating a bathroom. Spending money like drunken sailors! And they don’t notice that silly inflation. Why would they?
If I had the energy, I'd compile a list of all the people who sagely agreed 18 months ago that it was better to do too much stimulus than not enough, but who now sternly admonish Democrats for providing too much stimulus. Because the acceptable downside of "too much" was the risk of the temporary inflation that is currently occurring. Unemployment in the EU is still running close to 7% compared to 4.2% in the US, whereas inflation in the EU is 5%. Expected GDP growth for 2021 is above 5% vs around 4%. Life is full of trade-offs; in this instance, I think America has made the better one.
"I'm still happy as a clam."
Inflation has already struck and it has hurt - especially poor people with cash savings and NO real property.
They cannot be made whole - that's the problem with inflation, unlike other financial hits which have policy options that include measures that undo the fiscal losses (e.g. unemployment insurance).
A poor person would have to have a lot of cash savings to have lost more to inflation than they received in ’stimulus’ payments and/or enhanced UI.
Some seemingly random points.
1. Lumber prices are over $1000 for 1K board feet and rapidly rising, which is ~2-3x the normal trading range, pre-pandemic. Previous pandemic high was ~$1700.
2. London's Omicron-driven infection rate is doubling every 1.5 days. NYC is 3. Hawaii is 6. Delta infections were doubled roughly every 2 weeks. With zero mitigation, Omicron will overwhelm some states within a few weeks, not months.
3. Post-exogenous shock, prices will return to normal. Seeing as Omicron is going to be a massive wave, we're nowhere close to exiting our current exogenous shock.
4. Get ready for more supply constraints from hoarding.
5. It's hard to judge the quality of a policy addressing a black swan, sui generis event, precisely because there has never been an event in the past quite like it. Don't judge people too harshly; hindsight is 20/20 but foresight is really just a guessing game, here.
Note that Krugman remains on Team Transitory. He's simply making a point of acknowledging that his original predictions were off and laying down some markers for when he'd have to concede that Team Persistent was right.
I wish more pundits would hold themselves accountable like that.
Krugman himself in that article notes that a possible model for this inflation is the 46-48 surge, which obviously took a while to go down but was still considered transitory compared to the later 70s crisis.
Also he doesn't think the fiscal expansion had anything to do with it, again noted in the same article.