Did people eat two dinners in the 1970s?
By Scott Sumner
This Yahoo article made me smile:
And so simply put, the Fed does not believe any pricing pressures in the economy will warrant a change in its interest rate policy for the next three years.
To help explain this thinking, Fed Chair Jay Powell cited dinner norms in his press conference on Wednesday afternoon.
“There very likely will be a step-up in inflation as March and April of last year drop out of the 12-month window, because they were very low inflation numbers,” Powell said. “Those will be a fairly significant pop in inflation, but those will wear off quickly because [of the way] the numbers are calculated.”
“Past that,” Powell added, “as the economy re-opens, people will start spending more. You can only go out to dinner once per night, but a lot of people can go out to dinner. And they’re not doing that now, they’re not going to restaurants, they’re not going to theaters…and travel, and hotels, that part of the economy is really not functioning at full capacity.” (Emphasis ours.)
And while the Twitter commentariat had fun with Powell’s exact phrasing — apparently the kind of person who watches the entirety of a Fed press conference is also a multiple-dinner enthusiast — the point the Fed chair makes is economically sound.
I’m actually not sure what point Powell is making. Is it a point about aggregate demand (which can rise at trillions of percent per year, as we saw in Zimbabwe), or aggregate supply, which is limited by labor, capital, and technology?
The anticipated increase in growth, inflation, and a recovery in the labor market is all part of a one-time recovery story in the U.S. economy. A demand surge against stressed supply chains or understaffed restaurants and bars that results in higher prices this year will not last.
The dinner is a metaphor.
No one thinks the economy will grow at 6% for years to come. No one thinks the 7 million or 8 million jobs added back to the economy this year will be repeated next year. And Powell does not think any inflation pressures that result from this unlocking of activity will re-set the current inflation regime.
This is the Keynesian fallacy on steroids—the idea that inflation is caused by fast RGDP growth. In fact, it is precisely because economies can’t grow at 6% forever that inflation is a threat if NGDP grows too fast. I don’t currently fear high inflation, but not because of the reluctance of people to eat two dinners. In 2008, Zimbabweans often lacked even one dinner. Rather, I don’t currently fear high inflation because I expect the Fed to limit growth in aggregate demand to a path consistent with 2% long run PCE inflation.
Inflation is caused by too much money chasing too few goods—NGDP growth minus RGDP growth.