The WSJ had an article about prices going up for various things, all seemingly caused by market-specific factors.
Federal Reserve Chairman Jerome Powell said on April 28 that inflationary pressures resulting from supply-chain problems would likely be temporary and wouldn’t prompt the central bank to change policies aimed to keep borrowing costs down.
With apologies to Milton Friedman, the “new” theory seems to be that inflation is, anywhere and everywhere, a temporary and idiosyncratic phenomenon.
Except that the theory is not new. It is the same theory that prevailed in the early 1970s. Apparently there aren’t any economists left at the Fed who are old enough to remember back that far. And no journalists.
What really made inflation a crisis in the 1970s, as opposed to a slow rolling problem, were the fuel shocks. However, the US is a net energy exporter now.
What would trigger a genuine “crisis” in inflation. Usually it seems to be when you can no longer import something you have an inelastic demand for because your trading partner doesn’t want your currency anymore. What would that be for the US in 2021?
Great comment.
Maybe the equivalent of petroleum is now semi-conductors? Lithium ion batteries? Materials to make lithium ion batteries?
Some kind of rare raw material crucial to transportation or electricity generation and distribution?
Basically something that disrupts transportation, energy, or IT, as basically all industries depend on those things. Beyond semi-conductors, I don’t really know what other crucial things for which the US economy is utterly dependent on imports.
That seems to be a literal theory of “shock”. Prices are sticky, really sticky. It doesn’t matter how much money is sloshing around as long as there isn’t a shortage of some important import for which there is an inelastic demand. Only once there is does the stickiness unstick and lots of prices rise.
Win buttons. “Whip Inflation Now” are available on Ebay. Maybe their prices are rising?
Aren’t covid restrictions and unprecedentedly generous unemployment benefits that are nevertheless expected to expire genuinely “temporary factors”? These shocks contribute a great deal to current supply chain problems and short-term scarcity leading to higher prices.
For example, I read a report about a food processor which layed off a bunch of people at the start of the pandemic, but who can’t get them back to work because they get paid more not to work. But the demand for their product has not changed, indeed, all those non-workers still want to eat and to spend their unemployment money on the same foods the production of which they are no longer contributing. So, there is less supply, same demand, more money, and thus, higher prices.
But when the unemployment benefits run out and the processors can hire these people back, then the supply can rise to meet demand and we may even get a little *deflation*, which the Fed is probably thinking about trying to avoid.
There is certainly reason to worry, but also, these pandemic-related factors seem to provide a reasonable distinction from the situation of the 1970s.
What does “temporary” mean? One definition is not permanent. But, since permanent implies forever, the time frame of “temporary” becomes very vague. “Temporary” could mean short lived, but this raises the question of the meaning of short. When policy makers use vague terminology to sound astute, perhaps even “scientific”, all of us, journalists included, should demand more specificity.
One could ask for clarification on when the “temporary” phenomenon will end or what conditions will exist to signal the end. I think the policy maker’s difficulty answering those questions will illuminate the fact that thon does not have a clue about the issue in question.
I’d say temporary is 1-2 years. Essentially, if all of the pandemic constraints are lifted and inflation is still running hot, it’s not temporary.
Fed circa 2022-2023:
“We still think inflation is a temporary condition, just a longer temporary than expected.”
Can’t you just look at bond markets? For example, you could see a pick up in inflation for a couple of quarters, but see very little impact of that on the rates for 10-year notes, and then conclude that markets think that the higher rate of inflation is temporary. Now, to some extent that begs the question, because why do the bond traders believe that the higher inflation rate will not persist for such an extent that they should demand higher rates on bonds? Still, it would give policy makers something publicly verifiable to point to and say “the traders in the bond markets aren’t pricing in a higher rate of inflation in what they are paying for 10 year (or 5 year, etc.) bonds, and that discrepancy between what bond traders believe will be the rate of inflation over the next 10 years and the inflation rate presently is what we mean by “temporary” (or transitory, etc.)”. That doesn’t exactly answer the question of how long the higher rate of inflation will persist, as a sustained bought of higher inflation could be followed by a sustained bought of lower inflation (or even deflation) and still you would end up with say, a 2% annual increase in the CPI or PCE over 10 years. But when the bond markets are predicating annual inflation rates that are cumulatively higher than 2%, then you know that the elevated inflation rate isn’t temporary.
The above comment was meant to be in reply to Ernie.
I am a believer in EMT in the sense that it is impossible to make positive (risk-adjusted) expected return bets in the market without private and material information; but emperically asset prices have not been good predictors of the future.
For me, the real question is if the Fed is capable of stating a goal for a specific level of inflation over a period of time and then hitting that goal. If the Fed can do that, questions about whether variations in the rate of inflation from the Fed’s desired trend are temporary is quite irrelevant. The price level is going to land where the Fed wants it.
If the Fed isn’t capable of doing that, then I think the main task would be to answer why it isn’t capable of doing that. Over a sufficiently long period of time, isn’t the Fed able to use a combination of money printing and rate hikes to achieve whatever price level they want? Maybe it won’t be exact, but I would think that those tools would be enough to the price level in the right ballpark. Am I wrong about the Fed, and if so why am I wrong?
Over a sufficiently long period of time, isn’t the Fed able to use a combination of money printing and rate hikes to achieve whatever price level they want?
As Arnold suggests below, politics ruins everything.
For what it is worth- I would rather take the bond market’s view. They might be wrong this time, but the record of the last 14 years suggests otherwise.
https://alhambrapartners.com/2021/05/10/where-theres-mania/
UCLA taught me to distinguish between a shift in a curve vs a movement along a curve.
If you are convinced the US has shifted to a permanently higher path of money growth, we should have permanently higher inflation.
But if there is a shift in supply curves from COVID related transportation snafus and delays in reopening factories, there should be a shift in relative prices (not permanent) versus a sustained higher inflation path.
Joe Biden may be LBJ Part Two, but Jay Powell is not Arthur Burns Part Two.
I have to say I am puzzled by your attitude. Often you seem to channel Fischer Black, who thought that the Fed was just a big bank and what it did made little difference, and that the inflation rate was a social consensus indeterminate in any economic model. So, are you following Fischer Black or Milton Friedman?
The Fed’s policies determine the inflation rate? Or the Fed’s policies don’t matter? Chose one, please.
The Fed’s policies don’t matter nearly as much as fiscal policy. But indirectly the Fed is contributing to inflation by telling the fiscal authorities “Don’t worry about issuing a lot of debt. We have your back.”
I, too, studied Econ at UCLA (albeit as an undergrad) during the inflationary period of the late 1970s. Our Money & Banking prof taught us that the Fed’s monetary policies determined the rate of inflation. What would happen if the Fed didn’t dilute our money supply to support spending by Congress & the administration?
How does the share of the economy attributed to technology affect inflation? In the 70s, the economy was mfg heavy in value and employment. Manufacturing is not as big of an employer. These changes in the structure of the economy may dampen the same inflation factors from the 70s.
The biggest difference from the 70s is that Boomers are not entering the “consume mass quantities” rat race – they’re retiring. Reducing investment, reducing consumption, reducing income (and hugely against any reduction in Social Security payments – any politician who suggests some will lose their next election).
There is plenty of US capacity for most of most things – but some imports may be facing big increases.
Where are the predictions/ bets on what the 2021 inflation rate is going to be?
CPI or CPI minus food & energy or your measure.
Thanks to Biden’s reduction in oil production and pipeline distribution, but the FBI far more concerned about mostly peaceful Jan 6 protesters than about pipeline security, there are various interruptions possible in the supply of gasoline. Higher prices reduce the variation (maybe), but the prices ripple thru the economy,
The govt printing money to spend on semi-corrupt Dem cronies will waste a lot of the money; other amounts will go into financial assets.
We already have asset hyper-inflation.
There won’t be consumer hyper-inflation without food shortages – which will be preceded by food price increases higher than wages increased.
Today’s guesstimate for total end of year CPI inflation (minus food & energy): 5%. But I wouldn’t bet on it – very uncertain.
I laughed out loud with this one, Arnold (“With apologies to Milton Friedman, the “new” theory seems to be that inflation is, anywhere and everywhere, a temporary and idiosyncratic phenomenon.”)
I share your views on the ignorance of the callow youths who are policy advisers now. But what is the be done.
I graduated with an honours degree in Economics in 1981 and had just spent the best part of the previous four years ruminating on the problem of stagflation. Other than having a good understanding of a description of what was happening I think I left none the wiser on what to do about it.
I was surprised to find that the solution in my home (Australia) lay in the hands of a democratic socialist government led by Bob Hawke. He had the respect and gravitas to:
1. Bring in a circuit breaker that most areas of the economy would support (a prices and incomes accord) that brought growth in bad things (eg high inflation and wage claims in the centralised wage bargaining system to an end). As one of the few monetarists at my University I was pretty sceptical about the merits of this.
2. being a Labor government committed to a massive deregulation of the economy (floating the Australian dollar, reducing trade tariffs, getting rid of all sorts of price controls, bringing in enterprise bargaining (instead of central determination of wages), opening up the country to foreign banks, and so on and so on.
I doubt that the above model could be pursued now. It will be over-due if the next few years if governments use the post Covid-19 years to lift expenditure and over-regulate the economy.