In a recent post, I made the following claim:
So why wasn’t the overall inflation rate transitory, as many had predicted? The answer is simple. All of the cumulative inflation since 2019 is demand side, and demand side inflation is permanent. PCE inflation over the past 5 years has exceeded the Fed’s 2% target by a total of nearly 8%. NGDP growth has exceeded 4%/year by a total of roughly 10%. That’s the entire problem—supply shocks have nothing to do with it. If anything, we’ve had enough positive supply shocks (mostly immigration) to hold inflation 2% below the level you would expect from the extreme demand stimulus that was provided. The Fed actually got lucky.
I need to revise that final line to: The Fed actually got very lucky.
Today, the government announced revised estimates of GDP growth during 2021-23. Bloomberg has a graph showing the data for real output, but NGDP was revised by a similar amount:
A few observations:
In 2022, I had a debate with some commenters as to whether we were in recession. I said we were not, and they pointed to two negative quarters of real GDP growth. I replied that this was not the official NBER criterion, and that other data showed a strong economy. The revised data shows that there weren’t even two negative quarters. There was no recession in 2022, by any reasonable criterion.
In my previous post cited above, I mentioned a 10% overshoot of NGDP growth. With the revised data the overshoot was 11.5%, providing evidence that monetary policy was even more excessive than we had thought, and also further confirms that “supply shocks” were not the problem. A strong supply side held excess inflation to roughly 8%, or 3.5% below what one would have expected from monetary policy alone. On the plus side, the economy’s potential may be a bit higher than we had assumed, probably due to more immigration, but perhaps also reflecting an uptick in productivity.
Previously, the data had showed much stronger growth in GDP than in GDI, even though both are conceptually identical. Gross domestic income was revised upward much more sharply than GDP, so that gap is now considerably smaller.
Those previous estimates of GDI growth (yellow bars) never made any sense given the strong growth in employment.
READER COMMENTS
Thomas L Hutcheson
Sep 27 2024 at 2:35pm
But the inflation WAS temporary, just as Powell said it would be. Did anyone think that FIAT meant that inflation had to fall enough to make a _backward looking_ arithmetic mean = 2% PCE? How would that be a real income maximizing path of inflation?
Scott Sumner
Sep 28 2024 at 2:55pm
“Did anyone think that FIAT meant that inflation had to fall enough to make a _backward looking_ arithmetic mean = 2% PCE?”
That’s exactly what average inflation targeting means. A Dallas Fed publication even explained it that way.
Thomas L Hutcheson
Sep 27 2024 at 2:39pm
I’d say that monetary policy was _better_ than we thought. GDP was greater. What’s wrong with that? 🙂
Scott Sumner
Sep 28 2024 at 2:55pm
NGDP went from excessive to very excessive.
Craig
Oct 1 2024 at 11:09pm
“A strong supply side held excess inflation to roughly 8%, or 3.5% below what one would have expected from monetary policy”
I am not saying this is wrong, but when I was watching these numbers and reading about the CPI andnhow its measured generally I found owmer’s equivalent rent to be a troubling. I noted that, mathematically, as the Y/Y inflation figured rose, the OER was mathematically dampening the M/M numbers. In contrast on the way down the M/M OER numbers were pinning the inflation rate higher.
If CPI humming along at 1% OER probably fine but in the post-pamdemic spike, the OER is a problem. I’d suggest that stat becomes lagged when CPI spiking/crashing both causing inflation to be mathematically understated on the way up and overstated on the way down. By 3.5 percentage points? Not sure but OER is a relatively large weight in the CPI index.