On February 17, 2021, economist David Beckworth and columnist Ramesh Ponnuru, in an op/ed titled “Stop Worrying about Inflation,” wrote:
Hence the new round of inflation hand-wringing. The Harvard economist Lawrence Summers raises the prospect of “inflationary pressures we have not seen in a generation, with consequences for the value of the dollar and financial stability.” Olivier Blanchard, the former chief economist for the International Monetary Fund, warns that we risk not just “overheating” the economy but “starting a fire.”
They should relax. The evidence that high inflation is on the way is weak. It’s too weak, actually: An economy on the verge of a robust recovery would be showing more signs of rising inflation. Right now, inflation appears more likely to stay below its optimal level than above.
And what, in their view, was the optimal level of inflation? They don’t say, but it appears from context that they think it’s 2 percent annually.
On May 20, 2021, I wrote:
I would put an 80 percent probability on the prediction that before the end of 2022, there will be at least one twelve-month period in which the CPI has risen by at least 5 percent. I would also estimate less than a 20 percent probability that in the same time period, there will be a twelve-month period in which the inflation rate hits Carter-era 10 percent.
Between May 2021 and January 2022, the Consumer Price Index, seasonally adjusted, rose from 268.6 to 281.9, an increase of 4.9 percent. So my 80 percent bet is virtually certain to be correct. I also don’t think there will be a 12-month period before December 2022 in which inflation hits 10 percent.
How about the Beckworth/Ponnuru prediction? Way off.
Now, to be sure, a better measure of inflation, as I’ve always pointed out, is the Personal Consumption Expenditure index. Beckworth and Ponnuru point out that it tends to grow more slowly than the CPI. So let’s look at that number. Between May 2021 and December 2021, it rose from 114.8 to 118.7, an increase of 3.4 percent. So, while I had in mind the CPI for my prediction rather than the PCE, I think my prediction of 5 percent will come about for the PCE by the end of the year also.
READER COMMENTS
Craig
Feb 13 2022 at 6:09pm
“So, while I had in mind the CPI for my prediction rather than the PCE, I think my prediction of 5 percent will come about for the PCE by the end of the year also.”
And of course you could be correct. The problem with making predictions like these is that they are dependent on the actions of men and those actions can be unanticipated today. But its not like predicting the sunrise tomorrow morning. Sure, right now, today the inflation rate stands at 7.5% Y/Y. There has been significantly less money creation last year versus 2020 so sure its not unreasonable to suggest inflation will abate.
But it could also be that the taper and liftoff could trigger a deflationary recession, in that case, well, then the forecast might be too high. Or, one might predict that it could trigger a deflationary recession and the Fed will step on the gas again to reinflate the bubble and we’re back at 6-9% inflation.
But no matter how we slice it, no matter what the future 12 months ultimately will play out, there will be a basic problem hanging like the Sword of Damocles over the economy and over individuals because the money isn’t sound anymore. Should you save money? Should you pay down debt? What risk should you expose yourself to to stay ahead of inflation? If you open a business what are your input costs going to be? Labor costs? Looking at PPI v CPI PPI > CPI for past 12 months and I’m not sure when the labor market will settle, but I for one am not interested in doing anything until it does, right?
So whether you ultimately are proven right at 5%, or if inflation is 4% or 9%, the basic problem will remain which is that this monetary policy has injected a risk, an uncertainty about the value of the dollar.
Inflation expectations are NOT anchored at 2% and ultimately that is a recipe for instability and potentially disaster in the economy.
Matthias
Feb 19 2022 at 8:03pm
If you are really concerned, you can hedge that risk.
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