1) It's never so easy as deficits do or don't cause inflation. Excess deficits + a central bank unwilling to tighten if necessary, cause inflation. As long as there is a credible central bank inflation should be very hard to get out of control. All eyes on the Fed.
2) If Republicans come into power in a big way over the next 3 years it's likely to be on an anti-inflation platform. I suspect todays' inflation will be highly unpopular with the electorate.
3) Jack is just spouting crypto nonsense. However, I do believe a changing mindset among the public would be an early step in inflation becoming a long-term problem. I don't take his words literally, but I take them seriously as an indicator of how opinions are shifting.
4) I fear price controls are going to make a comeback.
I think Noah is misunderstanding the transitory vs non-transitory.
Non-transitory inflation is caused by structural factors that sustain inflation. Transitory is not.
If inflation is not transferring into wages, it will necessarily go away. You can't have 4-6 percent inflation for long unless wages keep up. Wages are not keeping up, so inflation is not self-sustaining. https://fred.stlouisfed.org/graph/?g=ILOI
Hyperinflation isn't "inflation on steroids", in fact it has nothing to do with inflation. Hyperinflation is caused by a loss of confidence in a currency, and the money printing is a RESPONSE to the falling value of said currency as it is sold off and its value decreases, and it cant pay for essential goods priced in an external currency.
It is doubtful that the USD can undergo such a thing, because it is the reserve currency, and where is the competing asset or currency which can absorb all those dollar flows necessary for hyperinflation? Not just that, where is the asset which has the trust and backing of rule of law and military?
Noah, maybe this is a dummy question, but I haven't seen anyone explain it well:
Why does it make sense to use year-over-year statistics for inflation (or...just about anything), given the anomaly that was 2020? Why aren't we using more rolling 24-month or rolling 36-month calculations?
Last year at this time the pandemic was nearing its peak, vaccines were just getting on the horizon, many folks I know just weren't spending money, lots of stuff wasn't available to buy (whether you had money or not). It's not just that inflation was "low" a year ago - it's that normal measures didn't make any sense. The economy was just plain weird.
Looking at it another way: If we go back in time to Jan 2018, and just pretend the next 4 years are "normal" with an inflation rate at 2.5%, wouldn't we be pretty close to where we are now? So ... the recent spike is not something to ignore, but I just don't get the panic at all.
Maybe what you're saying is as simple as this: Reasonably or not - people experience the pain of inflation on a 3-12 month timeframe and not on a 24-36 month timeframe. And so the Fed's job is all about managing the "inflation experience" that people feel, and the actual number hardly matters at all.
From this article, it seems like scare-mongering that inflation would increase is a great political tool with seemingly no downsides. If the inflation doesn't go up, everything is fine and they could easily defend themselves as "being cautious". If the inflation does go up, not only do they get to claim that their prediction is correct (even though it's just a constant), the prediction becomes self-fulfilling too, and can force deflationary policy. This makes any inflationary policies very dangerous to enact, while deflationary policies tend to hurt the richest the last.
On the other hand, people who constantly predict that inflation would decrease would appeal to almost no one. If the inflation does go down, most people would not bat an eye: either things are cheaper for them or they have lost their jobs and therefore voice on the political field. If the inflation doesn't go down, the prediction is proven wrong and loses its self-fulfilling magic.
This imbalance seems to naturally tilt the public opinion towards expecting inflation to increase. Any paper studying this from a game theory angle?
We do indeed need to start dividing up "Team Transitory". It makes no sense to have all the serious people on one team. It's like the Harlem Globe Trotters against some bunch of slobs who can't even dribble except maybe their saliva. Pretending the other side has some kind of shred of an argument gets tedious quickly.
Sure, US inflation could be on a long term trend to average 3 or even 4, if general opinion (on left and right) continues to gradually shift dovish. Sure, if democracy dies in the US, up to double-digit annual inflation would be expected. And if there's a total economic collapse, hyperinflation would ensue. (And in such a scenario, best of luck to anybody hoping to find a buyer for bitcoins.) None of those would have been bold or surprising statements before the pandemic.
But there are all sorts of differences of opinion among "Team Transitory". It's much more complicated than an argument between "inflation will subside soon without the Fed needing to act" and "inflation will subside sooner or later because if it doesn't subside without Fed action the Fed will act." The causes of inflation are complicated, and the debates about how to deal with them are complicated.
The first thing one needs in a debate like this is to know the numbers. From 2010 to 2019, nominal annual personal consumption expenditure growth averaged 3.9%, and annual core PCE inflation averaged 1.7%. And those parameters were relatively stable over that period. So we can take that as a baseline standard for the US economy, telling us that in normal circumstances, 4% annual nominal consumption growth will tend to give us about 2% inflation.
Through the pandemic period personal consumption has been extraordinarily volatile. If you annualize the quarterly growth rates - the way it's done in quarterly GDP reports - nominal PCE was shrinking at an annualized rate of 35% during 2q20, and rising at an annualized rate of 47% during 3q20. In the first two quarters of 2021 PCE was booming at 16% then 19% annualized rates. 3q21 was a getting-back-towards-normal 7%.
However, if we look at the average nominal PCE growth rate of 3q21 relative to 3q19, the figure comes in at a not-exciting 4.7%. That is less than the recent peak annual rate in 2018 (5.1%), in the wake of Trump's fiscal stimulus through combined spending increases and tax cuts. An average of 4.7% annual PCE growth might be expected to give us 2.5-3% inflation in normal circumstances.
So how can we getting so much more than that?
Part of the reason is the pandemic-induced production constraints you've heard so much about. But the most important reason is the great volatility, which is even stronger when you look past the aggregates and into the sectoral numbers. Some sectors like tourism are still very much impoverished. Other sectors such as housing and cars are overstimulated. The one thing "Austrian" theory got right is that stimulus never flows evenly across the economy. The same is true of splurge spending after forced pandemic savings.
These days pandemic-induced production constraints are not that big of an issue. Most of what is being called "supply chain bottlenecks" is simply demand outstripping supply for particular types of goods or services, most obviously for imported durable goods.
Still a member of Team Transitory. However, there are reasons for concern. I think that the "traffic jams" at LA/Long Beach and Savannah are likely the biggest source of both supply shock and inflationary pressures. E.g. My brother in Central Ohio told me grain elevators refused to accept grain for lack of shipping containers to export it. As an institutionalist, Joe Biden has been dealing with the supply snarl respecting existing import/export institutions. That isn't working. Instead, he should nationalize the engineering and logistics units of the National Guard in California, Georgia, and South Carolina for the duration of the crisis. Their mission will be to get import boxes off the piers and export boxes outbound.
A few things right, a few things wrong. The big one: monetary policy is the wrong tool to calibrate economic activity and inflation. It’s like pushing on a string, and small increases in interest rates offset their depressionary effect by injecting more money into the economy (through higher interest payments on government bonds), possibly increasing spending and inflation. Big increases in rates increase business COSTS. Increasing costs are inflationary. That is then offset by mass unemployment. VERY very inefficient and ineffective. Fiscal policy is the right tool.
This inflation is transitory. Gone in 6 to 9 months, depending if Saudi Arabia and Putin agree. (Then conventional wisdom will move on to reporting on whatever Boden is mumbling about.)
Inflation is easily managed through several tools including
1) down payment and margin requirements on real estate and securities,
2) targeted supply chain actions, and
3) broad based tax increases/decreases.
For example, the Job Gty/Green New Deal law should include AUTOMATIC across-the-board tax increases that kick in when certain monthly wage inflation targets are hit-say for 6 months in a row. These can include:
a) Income Taxes,
b) Sales/VAT Taxes
c) Asset Value (or Wealth) Taxes
That'll cool things off pronto. When inflation has cooled, the taxes automatically return to a base level.
We have been with elevated, high or very high inflation for four months, for me this is no longer transitory, or in other words, it is not transitory enough for me, taking into account only the result. Its causes may have been transitory, but I believe that it is necessary to set the limit of considering it transitory when the expectations of the majority stop being transitory and those expectations become high inflation in the short term. The Fed has adequate surveys and indices to measure this.
Jack Dorsey is talking garbage, if one can believe it.
Hyperinflation is something on the order of 50% per MONTH, and "arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy". See https://www.cato.org/sites/cato.org/files/pubs/pdf/workingpaper-8_1.pdf — a friggin' CATO INSTITUTE paper that manages to not scaremonger about inflation. A month of 6% year-on-year inflation (not exactly outlandish, it happened in 2008, in 1990, and repeatedly in the 1970s) isn't remotely a compelling harbinger of hyperinflation.
More generally, there's a good chance that even a 6% inflation rate won't be sustained. My pet crank theory is that inflation mostly reflects oil-price increases (https://splained.substack.com/p/inflation-is-mostly-oil-prices-us). Oil ain't just a relic of the 1970s!
Krugman points at the Korean War inflation, which hit 10% YoY by early 1951, only to tamely drop all the way to under 1% by 1953. Why do you think 1970s-type sustained inflation is more likely this time, rather than a 1951-type spike?
Historically, elevated unemployment seems to have been a lot costlier per year than elevated inflation. ("It takes a lot of Harberger triangles to fix an Okun gap.") So if we truly don't know, by default that's an argument for delay, not haste, in tightening, isn't it? We'd need some confidence to act early.
You seem more confident than Krugman that the Fed should tighten soon, more impressed by the 1970s' inflation than the 1950s' non-inflation. Can you say why?
Good piece. A few thoughts:
1) It's never so easy as deficits do or don't cause inflation. Excess deficits + a central bank unwilling to tighten if necessary, cause inflation. As long as there is a credible central bank inflation should be very hard to get out of control. All eyes on the Fed.
2) If Republicans come into power in a big way over the next 3 years it's likely to be on an anti-inflation platform. I suspect todays' inflation will be highly unpopular with the electorate.
3) Jack is just spouting crypto nonsense. However, I do believe a changing mindset among the public would be an early step in inflation becoming a long-term problem. I don't take his words literally, but I take them seriously as an indicator of how opinions are shifting.
4) I fear price controls are going to make a comeback.
I think Noah is misunderstanding the transitory vs non-transitory.
Non-transitory inflation is caused by structural factors that sustain inflation. Transitory is not.
If inflation is not transferring into wages, it will necessarily go away. You can't have 4-6 percent inflation for long unless wages keep up. Wages are not keeping up, so inflation is not self-sustaining. https://fred.stlouisfed.org/graph/?g=ILOI
Hyperinflation isn't "inflation on steroids", in fact it has nothing to do with inflation. Hyperinflation is caused by a loss of confidence in a currency, and the money printing is a RESPONSE to the falling value of said currency as it is sold off and its value decreases, and it cant pay for essential goods priced in an external currency.
It is doubtful that the USD can undergo such a thing, because it is the reserve currency, and where is the competing asset or currency which can absorb all those dollar flows necessary for hyperinflation? Not just that, where is the asset which has the trust and backing of rule of law and military?
"Japan in the 1990s went on a huge deficit spending binge that failed to get them out of inflation."
Typo? You meant deflation., surely.....
Did you read senior adviser to the Fed Jeremy B. Rudd's comment's about 'inflation expectations"?
http://bilbo.economicoutlook.net/blog/?p=48571
"Federal Reserve research paper kills another core New Keynesian idea about inflation expectations"
From a NYT article entitled: "No one knows how the economy actually works" ....(!)
Noah, maybe this is a dummy question, but I haven't seen anyone explain it well:
Why does it make sense to use year-over-year statistics for inflation (or...just about anything), given the anomaly that was 2020? Why aren't we using more rolling 24-month or rolling 36-month calculations?
Last year at this time the pandemic was nearing its peak, vaccines were just getting on the horizon, many folks I know just weren't spending money, lots of stuff wasn't available to buy (whether you had money or not). It's not just that inflation was "low" a year ago - it's that normal measures didn't make any sense. The economy was just plain weird.
Looking at it another way: If we go back in time to Jan 2018, and just pretend the next 4 years are "normal" with an inflation rate at 2.5%, wouldn't we be pretty close to where we are now? So ... the recent spike is not something to ignore, but I just don't get the panic at all.
Maybe what you're saying is as simple as this: Reasonably or not - people experience the pain of inflation on a 3-12 month timeframe and not on a 24-36 month timeframe. And so the Fed's job is all about managing the "inflation experience" that people feel, and the actual number hardly matters at all.
From this article, it seems like scare-mongering that inflation would increase is a great political tool with seemingly no downsides. If the inflation doesn't go up, everything is fine and they could easily defend themselves as "being cautious". If the inflation does go up, not only do they get to claim that their prediction is correct (even though it's just a constant), the prediction becomes self-fulfilling too, and can force deflationary policy. This makes any inflationary policies very dangerous to enact, while deflationary policies tend to hurt the richest the last.
On the other hand, people who constantly predict that inflation would decrease would appeal to almost no one. If the inflation does go down, most people would not bat an eye: either things are cheaper for them or they have lost their jobs and therefore voice on the political field. If the inflation doesn't go down, the prediction is proven wrong and loses its self-fulfilling magic.
This imbalance seems to naturally tilt the public opinion towards expecting inflation to increase. Any paper studying this from a game theory angle?
FWIW, it seems that European Central Bank is also on Team Transitory: https://www.reuters.com/business/cop/ecb-survey-shows-euro-zone-inflation-just-below-goal-2022-2021-10-29/
We do indeed need to start dividing up "Team Transitory". It makes no sense to have all the serious people on one team. It's like the Harlem Globe Trotters against some bunch of slobs who can't even dribble except maybe their saliva. Pretending the other side has some kind of shred of an argument gets tedious quickly.
Sure, US inflation could be on a long term trend to average 3 or even 4, if general opinion (on left and right) continues to gradually shift dovish. Sure, if democracy dies in the US, up to double-digit annual inflation would be expected. And if there's a total economic collapse, hyperinflation would ensue. (And in such a scenario, best of luck to anybody hoping to find a buyer for bitcoins.) None of those would have been bold or surprising statements before the pandemic.
But there are all sorts of differences of opinion among "Team Transitory". It's much more complicated than an argument between "inflation will subside soon without the Fed needing to act" and "inflation will subside sooner or later because if it doesn't subside without Fed action the Fed will act." The causes of inflation are complicated, and the debates about how to deal with them are complicated.
The first thing one needs in a debate like this is to know the numbers. From 2010 to 2019, nominal annual personal consumption expenditure growth averaged 3.9%, and annual core PCE inflation averaged 1.7%. And those parameters were relatively stable over that period. So we can take that as a baseline standard for the US economy, telling us that in normal circumstances, 4% annual nominal consumption growth will tend to give us about 2% inflation.
Through the pandemic period personal consumption has been extraordinarily volatile. If you annualize the quarterly growth rates - the way it's done in quarterly GDP reports - nominal PCE was shrinking at an annualized rate of 35% during 2q20, and rising at an annualized rate of 47% during 3q20. In the first two quarters of 2021 PCE was booming at 16% then 19% annualized rates. 3q21 was a getting-back-towards-normal 7%.
However, if we look at the average nominal PCE growth rate of 3q21 relative to 3q19, the figure comes in at a not-exciting 4.7%. That is less than the recent peak annual rate in 2018 (5.1%), in the wake of Trump's fiscal stimulus through combined spending increases and tax cuts. An average of 4.7% annual PCE growth might be expected to give us 2.5-3% inflation in normal circumstances.
So how can we getting so much more than that?
Part of the reason is the pandemic-induced production constraints you've heard so much about. But the most important reason is the great volatility, which is even stronger when you look past the aggregates and into the sectoral numbers. Some sectors like tourism are still very much impoverished. Other sectors such as housing and cars are overstimulated. The one thing "Austrian" theory got right is that stimulus never flows evenly across the economy. The same is true of splurge spending after forced pandemic savings.
These days pandemic-induced production constraints are not that big of an issue. Most of what is being called "supply chain bottlenecks" is simply demand outstripping supply for particular types of goods or services, most obviously for imported durable goods.
Still a member of Team Transitory. However, there are reasons for concern. I think that the "traffic jams" at LA/Long Beach and Savannah are likely the biggest source of both supply shock and inflationary pressures. E.g. My brother in Central Ohio told me grain elevators refused to accept grain for lack of shipping containers to export it. As an institutionalist, Joe Biden has been dealing with the supply snarl respecting existing import/export institutions. That isn't working. Instead, he should nationalize the engineering and logistics units of the National Guard in California, Georgia, and South Carolina for the duration of the crisis. Their mission will be to get import boxes off the piers and export boxes outbound.
Why is it so hard for the Fed to fight inflation without causing a recession? Is it the lag in rate change effects?
it's time to buy more ₿; sound money wins.
A few things right, a few things wrong. The big one: monetary policy is the wrong tool to calibrate economic activity and inflation. It’s like pushing on a string, and small increases in interest rates offset their depressionary effect by injecting more money into the economy (through higher interest payments on government bonds), possibly increasing spending and inflation. Big increases in rates increase business COSTS. Increasing costs are inflationary. That is then offset by mass unemployment. VERY very inefficient and ineffective. Fiscal policy is the right tool.
This inflation is transitory. Gone in 6 to 9 months, depending if Saudi Arabia and Putin agree. (Then conventional wisdom will move on to reporting on whatever Boden is mumbling about.)
Inflation is easily managed through several tools including
1) down payment and margin requirements on real estate and securities,
2) targeted supply chain actions, and
3) broad based tax increases/decreases.
For example, the Job Gty/Green New Deal law should include AUTOMATIC across-the-board tax increases that kick in when certain monthly wage inflation targets are hit-say for 6 months in a row. These can include:
a) Income Taxes,
b) Sales/VAT Taxes
c) Asset Value (or Wealth) Taxes
That'll cool things off pronto. When inflation has cooled, the taxes automatically return to a base level.
Easy Peasy.
We have been with elevated, high or very high inflation for four months, for me this is no longer transitory, or in other words, it is not transitory enough for me, taking into account only the result. Its causes may have been transitory, but I believe that it is necessary to set the limit of considering it transitory when the expectations of the majority stop being transitory and those expectations become high inflation in the short term. The Fed has adequate surveys and indices to measure this.
Jack Dorsey is talking garbage, if one can believe it.
Hyperinflation is something on the order of 50% per MONTH, and "arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy". See https://www.cato.org/sites/cato.org/files/pubs/pdf/workingpaper-8_1.pdf — a friggin' CATO INSTITUTE paper that manages to not scaremonger about inflation. A month of 6% year-on-year inflation (not exactly outlandish, it happened in 2008, in 1990, and repeatedly in the 1970s) isn't remotely a compelling harbinger of hyperinflation.
More generally, there's a good chance that even a 6% inflation rate won't be sustained. My pet crank theory is that inflation mostly reflects oil-price increases (https://splained.substack.com/p/inflation-is-mostly-oil-prices-us). Oil ain't just a relic of the 1970s!
Krugman points at the Korean War inflation, which hit 10% YoY by early 1951, only to tamely drop all the way to under 1% by 1953. Why do you think 1970s-type sustained inflation is more likely this time, rather than a 1951-type spike?
Historically, elevated unemployment seems to have been a lot costlier per year than elevated inflation. ("It takes a lot of Harberger triangles to fix an Okun gap.") So if we truly don't know, by default that's an argument for delay, not haste, in tightening, isn't it? We'd need some confidence to act early.
You seem more confident than Krugman that the Fed should tighten soon, more impressed by the 1970s' inflation than the 1950s' non-inflation. Can you say why?
Damn. This is not promising. I am still hoping supply chain issues will be alleviated in time.
What is the case for why 30yo with negative net worth from student loans should be worried about general inflation?