Krugman at What Happened to Inflation? gives a participant-observer overview of the recently concluded Inflation Wars (although, like the unfortunate British at the Battle of New Orleans, news of the victory has not reached the Fed which is still in the trenches).
Yes, inflation is down.
Yes-Yes, inflation is really down measured w/o Owner Equivalent Rent (OER) in the metric
Yes-Yes-Yes, inflation is NOT how much a price index has increased since 20xx and it would NOT be a good idea for the Fed to try to return the price level to the of some past date. Uncharitably one suspects that some people who were happy (mistakenly) to complain about inflation due to Biden’s (but not Trump’s) fiscal deficits, are just disgruntled at having to find something else to grumble about. 😊
Krugman then observes how some like Larry Summers – and not <he he he> Paul Krugman -- thought reducing inflation would require a long period of high unemployment, “But that pessimistic take proved wrong. Although the unemployment rate has drifted up a bit, it remains historically low — yet as I’ve been saying, inflation appears to have been beaten anyway. What went right?
The simplest, most plausible answer is that high inflation was mainly caused by disruptions related to Covid.”
Close. “ …high inflation was mainly caused by _Fed policies to permit the economy to adjust to the_ disruptions related to Covid.”
“There are, of course, many details in this story and some big unanswered questions.
In particular, how much of a role did interest rate hikes play in disinflation? [A lot, although maybe at first through expectations. TIPS expectations of inflation started falling in March 2022 when the Fed had only barely begun increasing EFFR. In fact, by the time the Fed had pushed it to the level it is still at in May 2023, TIPS expectations were already on target.]
Did the Fed really need to tighten as much as it did?
[No, it could have tightened less if it had started tightening sooner. TIPS expectations of inflation first rose above target in September 2021, nine months before the Fed touched the EFFR!]
(and is it behind the curve on cutting rates now that inflation is down?)”
[Yes, and has been for months. TIPS expectations have, except briefly, been below target since May 2023.]
But the basic outline of what happened seems clear. And it is, among other things, a big vindication for Bidenomics.
No. The inflation and employment trajectories are not a vindication of “Bidenomics.” Macroeconomic outcomes, levels of employment, inflation disinflation are orthogonal to Presidential Administrations; those outcomes are determined by Fed policies.
It is rather a total vindication of the Fed policy of inflating to bring the economy out of recession and partial vindication of its bringing Inflation back to target (so far) without recession, although TIPS inflation expectations are worryingly low and hard to square with an expectation of no recession.
[Standard bleg: Although my style is know-it-all-ism, I do sometime entertain the thought that, here and there, I might be mistaken on some minor detail. I would welcome comments on these views.]
Image prompt: Middle aged men dressed in business suits but wearing WWI style helmets in a trench with artillery shells bearing dollar signs flying overhead. [Kudos to DALL-E for making one of the guys look like Ben Bernanke. 😊]
Hey Thomas - thank you so much for writing this. I read it and it's very useful ! thank you
Hi Thomas -- your a damned good writer - and I've got a question -- how does "clean electricity" figure into this -- because there is one hell of a lot of money being spent on standard "status-quo" / "acceptable" -- but no electric bills are lowering.