I do. I remember the rate of inflation rising dramatically. I recall people offering these explanations:
1. A Soviet crop failure that caused global wheat prices to soar.
2. A war in the Middle East that caused a global oil price shock.
3. Too much fiscal stimulus during the previous year.
None of these were the actual cause of high inflation. The real problem was nominal—easy money. Nominal GDP shot up at a rate of 11.4% in 1973. While real GDP also grew at a relatively fast pace, high inflation is almost inevitable in a year with 11.4% NGDP growth.
BTW, we don’t yet have NGDP growth data for 2022, but the most recent 4 quarter growth rate is 11.8%.
I’m certainly not predicting 1970s-style inflation for the 2020s, but the Fed needs to get its act in gear. Saying, “it’s just supply shocks” doesn’t address the excessive NGDP growth.
PS. The Datsun in the picture above brings back memories. I recall that almost everyone in America thought the company’s executives were nuts when Nissan changed the name of their US exports to that of the parent company. I still think that. Datsun sounds way better to an English ear.
READER COMMENTS
Rodrigo Escalante
Mar 4 2022 at 6:26pm
Is the fed still secretly betting on inflation being transient? It feels they went all in betting inflation will moderate on its own, in the meantime inflation expectations keep rising. Only a couple of years ago the fed would have stomped on the breaks months ago. How did the fed go from being ultra hawks to uber doves overnight? What will it take for them to wake up and actually tighten policy? Do they believe they are helping by taking such a soft stance on inflation? The market does not seem to think they are.
Scott Sumner
Mar 5 2022 at 1:09pm
“How did the fed go from being ultra hawks to uber doves overnight? ”
Another hypothesis is that they did not change their ideology, rather they simply made different mistakes.
Michael Sandifer
Mar 4 2022 at 8:29pm
Of course, the Fed did not have the same view of economic theory or policy regime in ’73, nor the indicators of inflation expectations we have today. They also weren’t coming off of a long period of tight money, as they were pre-pandemic.
If you really think NGDPLT is close to optimal monetary policy, and you’re a market monetarist, it implies focusing on NGDP growth expectations, or at least inflation expectations. Correct me if I’m wrong.
Yet, again, you’re mentioning current NGDP. We had an extreme, if so-lived, recession in 2020. We’ve still got numerous supply-side issues that markets seem to expect to wane.
Do you trust markets, or not?
Scott Sumner
Mar 5 2022 at 1:10pm
“Do you trust markets, or not?”
Yes, that’s why I’m worried.
Michael Sandifer
Mar 5 2022 at 7:55pm
Mean NGDP growth expectations have fallen .16% since February 10, given the change in the S&P 500, which is down 3.9% since. 5 year inflation expectations are up 38 basis points over the same period, with the 5 year real interest yield down 58 basis points. If we consider the real yield as a proxy for the change in RGDP growth expectations, we obviously have a net loss of 20 basis points in expected NGDP growth by this measure, which is pretty consistent with my interpretation of S&P 500 data.
This, in turn, implies a mean expected NGDP growth path between 4.1% and 5.1%, but is closer to 4.1%, given temporal discounting.
So, yes, given an 4% NGDPLT, monetary policy is a bit loose, but since I favor an NGDPLT of 5-to-5.5%, I’m still relatively happy.
I understand, of course, that even a small deviation in inflation can make for a much bigger difference in terms of RGDP. If I’m correct, you’re primarily concerned about the Fed having fallen behind in controlling inflation, now by their own admission, and slamming on the brakes too hard?
Otherwise, I just don’t see what the danger is. I’m fine with things as they currently stand, though I was also fine with things before the recent tightening cycle.
Matthias
Mar 5 2022 at 9:22pm
You need to be more careful:
NGDPLT targeting would suggest focussing on NGDP level expectations, not growth expectations.
Targeting of a long running average of a rate behaves like targeting a level.
It’s a good point that expectations are important, but: level targeting means that bygones won’t be bygones.
And if the level is seriously over your target trajectory, and you know that policy won’t allow decreasing the level, you know that you are in trouble; relatively independent of expectations.
That observation applies to both price level targeting and ngdp level targeting.
BC
Mar 5 2022 at 1:11am
What is the effect of too much fiscal stimulus if an inflation-targeting Fed offsets it? Higher real interest rates and lower private investment?
Scott Sumner
Mar 5 2022 at 1:10pm
Yes.
Matthias
Mar 5 2022 at 9:23pm
In practice also lower rgdp growth, if you assume that government spending isn’t as efficient as private spending.
Lizard Man
Mar 5 2022 at 6:24am
Inflation might always be a monetary phenomenon. But wouldn’t a negative supply shock like OPEC cutting production combined with excessive NGDP growth produce both high inflation and high unemployment?
Scott Sumner
Mar 5 2022 at 1:11pm
In a directional sense that is correct, but the effect on unemployment may be small unless the oil shock is extremely large (much larger than the recent shock.)
Thomas Lee Hutcheson
Mar 5 2022 at 6:33am
The TIPS has been signaling for some time that the Fed’s commitment to 2% average inflation is not believed. Unfortunately we really do lack more intermediate TIPS to send a clearer signal about how spikey (or not) this market is expecting.
Spencer Bradley Hall
Mar 5 2022 at 9:19pm
AD, money times transactions’ velocity, increased substantially in 72-73 (about a 33 percent increase). The fact is that the FED validated OPEC’s price hikes.
The FED has already tightened monetary policy, so the current oil price hikes will be deflationary in other sectors if the FED continues on its current path.
Spencer Bradley Hall
Mar 6 2022 at 10:41am
In the decade before 1964, AD, the volume and velocity of money, aggregate monetary demand increased at an annual compounded rate of about 6 percent. In the 9 subsequent years AD increased more than 13 percent. In the 72-73 period AD increased 30 percent.
Because R-gDp and presumably the volume of goods and services offered in the markets was increasing at a rate of less than 5 percent, it was no surprise that a result was an intensification of the chronic rates of inflation.
Spencer Bradley Hall
Mar 6 2022 at 11:20am
“The Great Demographic Reversal” will stoke inflation beyond the 73-74 experience.
Comments are closed.