If we take CPI as our measure and assume that June was the peak for headline inflation, here's how long our current round of inflation lasted:
- Headline: 15 months (April 2021 to June 2022)
- Core: 12 months (April 2021 to March 2022)
Does 12 months count as transitory? Certainly it's longer than Team Transitory initially expected, which I think was around six months. On the other hand, one year isn't really all that long, especially when you consider the exacerbating effect of the Ukraine war, which was hardly predictable.
Personally, I was on Team Transitory all along and I still am. Am I just being stubborn? Maybe, especially when you consider how high inflation got. But in the great scheme of things, I don't think 12 or 15 months counts as a major league round of inflation. We took a chance on a big stimulus bill keeping the economy strong at the risk of higher inflation, and unfortunately the risk of inflation turned out to be real—largely because pandemic supply chain problems lingered longer than we expected; 2021 housing price increases got recorded this year for technical reasons; and Vladimir Putin decided to invade Ukraine and then botched it. But even knowing all that, I'd still make the same choice today. Maybe I'd cut back the stimulus bill a bit, but only by a bit.
Kevin , I think it's a little premature to say inflation is over. 8.5% is still pretty high.
But it does look like we are heading in the right direction. The stock market seems to agree.
Year over year inflation is still high, month to month has prices holding relatively steady depending on the measurement.
I was always and remain team transitory, but it does seem wrong to say that just because inflation measures have (at least temporarily) declined that we're out of the current "round of inflation". the inflation rate remains historically very high and we have no great reason to believe the current decline will continue back to "normal" levels. So in my mind it's far too early to call this a win for team transitory even if you believe 15 months is a reasonable definition of transitory.
Personally, I was on Team Transitory all along and I still am.
Me too and good analysis of the things Team Transition had no control over (COVID-19 in China, Ukraine war). Their only mistake may well have been unbridled optimism.
Let's say inflation goes down to 4-5 percent. To me that's where "normal" should be because for too long inflation was low because labor costs were so low and that has its own effects on the economy and society.
I fear team transitory is being overly optimistic. The Fed's goal is 2% inflation: we are still 4X from the goal....
Many of the price increases (rent, shipping costs, labor wages) are not likely to reverse when the conflict in Ukraine ends or when supply chain fully adjust. Rather, these items are now permanently more expensive and the aforementioned price increases become embedded in secondary items: companies will have to pay more to ship, retain talent etc.
Rent is definitively reversing.
Dammit, for the umpteenth time, prices remaining at a steady higher level contribute ZERO to inflation. Inflation is a rate of change, NOT a level. Prices leveling off reflect an economy that is adjusting to the new levels, bringing inflation down.
+1
Inflation is always measured between periods: in this case, we are measuring year over year inflation.
Which option do you think is superior
1.) 20% annualized inflation in month one, then no inflation for the remaining eleven months.
2) 1% monthly for all twelve months.
So respectfully, given that working class wages are not rising as fast as annual inflation, I find your statement not very insightful...
Superior with respect to what purpose? A year-over-year measure that reflects a one-time step increase 11 months ago would be a foolish basis for policy-making. For that matter, making policy purely on the basis of a number, without any understanding of what is causing the change, would be foolish.
While wages and retail prices often don't go down, they do stabilize to a new normal. This is hardly the first rent spike and after a short time things always settle down.
Kevin produced a chart showing shipping costs have already returned to normal. That is one of the things that can easily swing from overpriced to under priced and back again.
And raw material prices swing wildly. Every couple of years something spikes and then drops down to the old price. It really does happen all the time. If prices drop too low then mining companies go out of business and prices rise. When prices rise, more gets produced and prices fall. Even oil is sometimes cheep and will be again in the future.
The stimulus was about as right sized as one could do.
A lot of companies really screwed up with inventory and supply chain management, far beyond the covid induced problems. And a lot of them didn't seem to keep the staff on so they could ramp back up quickly, even though that's what their stimulus money was for. Unfortunately, what these companies have discovered is that their mismanagement has given them pricing power. It's not like there's a competitor with a lot of excess capacity and lower margins who could sweep in and steal customers.
I'm on Team "What was the Alternative???". At this point, Paul Krugman admits that Larry Summers was "right" -- the stimulus package contributed to more inflation for longer than Krugman expected. But the idea was always that you were trading some amount of inflation for avoiding the worst aspects of a downturn. How much downturn were we supposed to tolerate for less/shorter inflation? Could we have knocked 1% off of inflation? 6 months off? And what price would we have paid for that back during the worst of the pandemic, as opposed to now? That's more the discussion I'd like to hear.
Thanks for adding this important point. A lot of human pain and difficulty, especially for people on the bottom margins, was prevented or minimized by the
stimulus package. Yes, inflation affects them as well but I notice the people who seem the most concerned about inflation are the rentier class and their minions .
Discussion is always welcome, but of course the answer to your questions is in each case, ‘Nobody knows’. Economics is an extremely immature science, it just can’t give us solid answers.
We still don't know what the extent of the stimulus package(s)' contribution to inflation has been.
Personally I'm still on team Greedy Corporate SOBs And Their Unjustifiable Price Gouging as the major cause.
Any list of reasons for inflation that does not include price gouging by (near) monopolies in key industries is incomplete.
I’m also team transitory. I know Krugman has partially back tracked, but he had earlier used the example of the late 40s to explain what is happening now. I think he said 1947-49 experienced high inflation, at times much higher than today. The reason, obviously, is because the economy was doing very well, but production had to be transitioned from war to peace (Of course, a simplified explanation). Once everyone was convinced that the expansion was going to continue and the Great Depression wasn’t coming back, everyone continued to buy and race to expand production, and supply chains had to be changed too, etc. But interest rates were not raised in a panic and most people expected things to settle down which they did.
This sounds a lot like what we went through. Everyone knows about the chip shortage and how many items, especially cars, have been affected. Is everyone forgetting about all the saw mills that were shuttered and had to be restarted? And oil production was substantially reduced. There was the transport crisis. And yes, a lot of things are more expensive now that many, many raw materials are in short supply because of Putin thinking he’s a Tsar. But unless interest rates are raised so much that the economy collapses (a much worse situation), the Fed can’t make supply meet demand. And raising interest rates only several more points isn’t going to make inflation magically go away because supply is the problem. The housing market is already cooling and raising rates more will only do so much.
And I disagree with Kevin and Larry Summers. I think the last round of stimulus did very little. I’m sure some inflation was produced by it, but only a little. Maybe the economy, and especially employment, would have grown a little slower, but all the shortages still would have taken place because many business owners are no better at predicting the future than you or I. Actually, many seem worse at it. You still would have had all the shortages, just maybe a few months later. The problem wasn’t that growth greatly outstripped supply (which higher interest rates can help with). It was that supply decreased (which higher interest rates can’t help with).
I honestly don’t know why food prices rose last year. It isn’t like people weren’t eating before, but then because of the stimulus they suddenly started eating. Again, not sure how higher interest rates could have helped with that or how they could help now with the global disruptions. I’ll go back to shouting at clouds now.
Fuel costs and invasion of Ukraine by Russia raised costs for food producers, the war raised costs for fertilizer, etc.
The bird flu led to cullings of millions of chickens, meaning fewer eggs and poultry and higher prices.
Drought and wildfires in western half of the country means herds can not be maintained and have to be sold off--though limited beef processing facilities meant ranchers get lower costs and consumers saw prices going up. It also means lower crop yields, so higher costs overall.
Heat waves world wide have affected grain and food production in general.
Who exactly would be helped if the stimulus had been smaller? Probably not anyone who is actually struggling with inflation.
The inflation hysteria of 2022 is still overblown and ridiculous. But we gotta panic about something I suppose.
The corporate media want Republicans back in power at any cost.
A lot of economists and others, even many who describe themselves as liberals, keep saying that wage increases are at least partially driving inflation. But think about this - whenever you see a report about the hugely increased price of some specific item, ask whether this increase could have been caused by people getting a few percent higher wages. Food items? No - the people who work on farms are still getting peanuts. Cars? No - this is a problem with lack of chips because of a factory fire and other supply-chain problems. Gasoline? No. And so on. Wages are not now a problem, and really haven't been a driver of high inflation since WW II. But a lot of people with influence on legislators and in the media would like to see wages remain low since that makes profits higher.
Totally agree.
I read somewhere that credit card processing companies have raised their processing fees by ca. 1 percentage point. That goes directly to inflation. With people paying more, they make more money anyway....
Seems this is a case where a long-term, historical chart is quite conspicuous in its absence.
You may be right about 12 months, but I'd be interested in another measurement--the number of months where average wages adjusted for inflation were falling. Is that going to be shorter or longer than 12 months?
Sorry, Kevin, but you are not thinking clearly.
I was totally on Team Transitory. But it wasn't transitory. Two sharp rate increases and the sense of a current recession only brought it down a little. It certainly hasn't come down on its own.
No way to run the counterfactual, so, no, the current situation is not evidence that inflation would have been ‘permanent’. Besides which, there is no agreement on what duration counts as ‘transitory’.
Nope. Port clogs caused vendor panic last fall/winter which lead to a lot of inflation in stuff like furniture and cloths.......which was not quite true. Auto is the same. If they pump out new cars with persistent overtime as they are planning, it's the next price drop. Then Putin comes off the first half of next year. 0-1% inflation cpi inflation would not surprise me by June.