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This week’s fresh data shows consumer prices Continue to increase At the fastest pace since 2008, it is rising faster than many economists, including the Federal Reserve economist, expected. This surge is clearly linked to the economic recovery from the pandemic.
What’s not clear? When and how much today’s rapid inflation will subside.
Most policy makers say their best guess is that prices will settle as companies pass the summer burst and supply catches up with consumer demand. They also point out that global power has reduced inflation over the years.
However, some economists and many Republicans warn that today’s rapid rise could change consumer and business expectations, making rapidly rising prices more likely to stay here. .. As a result, the Fed is forced to withdraw support for the economy in order to slow demand and keep inflation under control, which could put the economy in recession.
Which side is right — optimistic or frightened — turns out to be very important to everyday Americans. Inflation can facilitate debt repayment and give workers room to negotiate high wages. But it can undermine purchasing power, deplete savings, and, if serious enough, destabilize the economy as a whole.
Federal Reserve Board Chair Jerome H. Powell said this week that “we are experiencing a significant rise in inflation that is greater than expected and certainly greater than expected.” “We’re trying to figure out if it’s going through pretty quickly or if we really need to act.”
Powell cites why he expects price pressure to weaken. The data soared, thanks to statistical quirks and the end of the blockade. But he also revealed that the moment was uncertain and “humble about what we understand.”
DealBook asked economics experts, former government officials, and leaders of current policy critics if they were worried about the future path of inflation. — — Janna Smiarek
Austin Goolsby: Due to a temporary supply problem.
Goolsby is a professor of economics at the University of Chicago Booth Business School.
I’m leaning towards team temporary. Economists call it the outcome of maintaining the “potential” of the economy with full employment. When the economy exceeded potential output (which seems to be in imminent danger), it was time to think about overheating.
Exceeding potential output in the 1960s helped ignite inflation for more than a decade, but much higher than it is today, and has been around for almost eight years. Our situation is similar to that of the late 1990s, mid-2000s and 2017-2019, all igniting sustained inflation, even though the unemployment rate is well below today. I didn’t put it on.
Difference between real GDP and potential GDP
This suggests a temporary supply chain problem unless something about the pandemic fundamentally changes the sustainable employment rate of the economy.
The story of overheating is controversial as the virus rampages. But what is the fear if temporary inflation is a sign that rising wages and abundant employment are returning to GDP growth?
What business leaders are saying:
“Is inflation going to be temporary? There are many reasons for the peaks we see at this point. But what are the long-term trends? I think everyone is watching closely. I don’t think there is a jury. ” — Citigroup CEO Jane Fraser
“Is there a little more inflation there? Yes. Are you going to price it to deal with it? We are certainly.” — Hugh Johnston, Chief Financial Officer of PepsiCo
“I don’t think everything will be temporary, but if we’re experiencing very strong growth, that’s not a problem.” — Jamie Dimon, Chief Executive Officer of JP Morgan Chase
Laura Rosner-Warburton: Inflation is tied to a pandemic.
Rosner-Warburton is a Senior Economist and Founding Partner at MacroPolicy Perspectives.
The effects of fiscal support are already diminishing, which should reduce demand and ease upward pressure on prices. Without strong financial support, consumer price sensitivity should recover. Meanwhile, supply and production are expanding, alleviating the shortage of key items whose prices are skyrocketing.
Daily business briefing
In short, this year’s inflation surge is very closely linked to the unprecedented events surrounding the pandemic and is not the beginning of a new regime in inflation dynamics.
Glenn Hubbard: “Temporary” doesn’t mean anything.
Hubbard is the Honorary Dean of Columbia Business School.
Here’s my view of inflation: What if my outlook is wrong? The Federal Reserve Board has assembled it as follows: And if you tighten it too late, inflation will occur. But we are cautious and have the tools. It’s never too late. By the way, inflation expectations are stable, so the market believes in us. So we are fine. “
But that’s not the way I see it. And that’s why I’m worried. Thinking of it as a risk management issue, if the central bank does not take its step off the accelerator now, it may have to brake later. And if I were Chair Powell, tell people what the Fed really thinks, reduce bond purchases, and tell people when the Fed plans to tighten.
What I’m worried about is that if the Fed doesn’t take this approach, housing market turmoil and excessive risk-taking pose risks of recession and financial instability.
The problem with saying that inflation is “temporary” is that there is no definition there. In other words, in the eyes of God, my life is temporary. What is temporary?
Jason Farman: Inflation remains higher than expected, which is fine.
Mr. Ferman is a professor of economic policy at Harvard University.
I think inflation will slow dramatically from the recent pace. However, the pace is so fast these days that even after a slowdown, it can easily settle to around 2.5-3%, rather than the 2% that the Federal Reserve and most forecasters expect. I don’t consider it a big issue. I think there are several benefits to raising inflation.
But I’m worried about three things. First, if the Fed overreacts in an attempt to get rid of inflation, it can cause a recession. Second, when something unexpected happens, it causes turmoil in financial markets. Currently, financial markets expect inflation to return to 2%. If it turns out to be wrong, financial markets need to change their direction. And usually it works, but sometimes it hurt the economy. And finally, when you have surprising inflation, it tends to do things that deprive workers of purchasing power.
Since World War II, there have been six periods of inflation above 5%.
From July 1946 to October 1948: Supply shortages and stagnant demand contributed to postwar inflation.
From December 1950 to December 1951: When the Korean War began, consumers stockpiled goods.
March 1969-January 1971: The booming economy has caused price increases.
April 1973-October 1982: Oil prices have doubled.
April 1989-May 1991: The first Persian Gulf War led to higher oil prices.
July-August 2008: Gasoline prices have skyrocketed.
Year-on-year change in consumer price index
Of these six periods, the White House claims that the first period is the most relevant. “Unsurprisingly, supplies were scarce or completely exhausted during the war,” said a group of Economic Advisers. I wrote recently.. “The same goes for today’s shortage of durable consumer goods. The national crisis had to disrupt normal production processes.”
Inflation fell during that period after the supply chain normalized and demand leveled off. The White House argues that the same can happen with inflation today.
Christina Romer: The lesson of inflation in the past is to stay flexible.
Romer is a professor of economics at the University of California, Berkeley.
Like most economists and policy makers, I expect much of the rise in inflation to be temporary. Many experts evoke the experiences of the 1960s and 70s as the tales of the present era. They are particularly concerned that inflation expectations, which have been low and stable for the past 40 years, may become “unfixed” and rise rapidly. While inflation expectations rose in the 1960s and 1970s, it took years of extraordinary growth and actual inflation to boost inflation expectations and start a spiral of wage prices.
A more important lesson from the 1960s and 70s is that we need to remain flexible. As it is today, policymakers in its early days often cited temporary factors such as drought, rising oil prices, and union activity as causes of inflation. But in reality, they faced inflation backed by very sustainable demand. If today’s inflation rates don’t settle as the recovery progresses, we need to quickly admit that we were wrong and that inflation is the more worrisome kind.
Robert Shiller: Stop making the same mistakes.
Schiller is a professor of economics at Yale University.
Inflation rewards debtors and hurt creditors. Young homeowners tend to be debtors, so it tends to help young homeowners at the expense of older people who may be living on pensions that are not fully linked to inflation.
The “big inflation” that ended after Paul Volcker took command of the Fed in 1979 affected pensioners and minimum wage earners because minimum wages were not properly indexed for inflation. It was a national tragedy.
People do not demand inflation often enough and do not fully understand it. Irving Fisher, a professor of economics at Yale University, wrote the book “Money Illusion” in 1928, explaining common misconceptions about inflation. Almost 100 years later, people still make the same mistakes, which contribute to income inequality. They also create malicious feelings, and this social discord causes problems for all of us.
Josh Bivens: The Fed’s reaction to inflation can be worse than inflation itself.
Bivens is the principal investigator of the Institute for Economic Policy.
Rising prices can certainly put pressure on family budgets, and everything else is the same. However, recent inflation has been driven by soaring prices in a few sectors such as used cars, hotel rooms and airfares. Inflation caused by a peculiar sector shock should not force policy makers to put a brake on it.
Its only inflation should Accelerating the more contracting macroeconomic policy is inflation coming from the labor market, which makes employment very abundant and successfully demands wage growth that far exceeds the economic capacity of workers to provide it. It’s time to be able to do it. This hasn’t happened in the United States for a long time.
Inflation hawks may argue that this is because the Fed has succeeded in staying ahead of the inflation curve. But the Fed often shortens recovery before the wages of most US workers achieve decent growth.so Recent researchSince 1979, the majority of US workers have estimated that the most important reason for anemia wage increases is austerity macroeconomic policy.
So while I’m a little worried about recent inflation, I’m very worried about the improper reaction to it.
What do you think? Will high inflation continue or will it disappear? Please let me know: Dealbook@nytimes.com..
Are you worried about inflation?Experts participate
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