[NB I am NOT stalling on my attempt to answer “Inflation Questions” [https://thomaslhutcheson.substack.com/p/inflation-questions] But if It is worth PIIE’s trouble to present Bernanke and Blanchard’s conclusions on pandemic inflation, something I have written about previously [https://thomaslhutcheson.substack.com/p/the-lessons-of-pandemic-inflation], the least I could do is comment.]
Ben S. Bernanke (Brookings Institution) and Olivier Blanchard (PIIE)
In a collaborative project with ten central banks, Bernanke and Blanchard investigate the causes of the pandemic-era global inflation, building on their work for the United States.
KEY TAKEAWAYS
1. Global pandemic-era inflation resulted primarily from supply disruptions and sharp increases in food and energy prices; the inflationary effects of these supply shocks have not persisted, however, in part due to the credibility of central bank inflation targets.
As the effects of supply shocks have subsided, tight labor markets, and the resulting rises in nominal wages, have become more important sources of inflation in many countries.
In a number of countries, including the United States, curbing wage inflation and returning price inflation to target may require a period of modestly higher unemployment.
Marcus Nunes has a take on this that I am sympathetic with [https://marcusnunes.substack.com/p/the-phillips-curve-mentality-lives] but my own is different. B&B’s conclusions for the US are not so much wrong, as not giving good guidance for monetary policy to deal with future large economic shocks. My alternative applies to the US. I think some would apply more generally, but I am addressing this could apply elsewhere, but that is not my claim.
Proceeding through the three takeaways:
Global pandemic-era inflation resulted from the Fed dealing with supply disruptions, the sharp increases in food and energy prices sparked by the Russian invasion of Ukraine, but most of all the interruption in ordinary commercial and social interactions [“lockdown”] and the shift in demand patterns that entailed. B&B fail to give the Fed credit for facilitating the adjustment of the economy to these shocks with over-target inflation. Inflation _did_ rise higher and persist longer than necessary – TIPS inflation expectations rose above target (actual inflation was already above target) in September 2021 -- yet the Fed did not begin to raise the EFFR until March 2022. This error was better than the opposite error of not creating enough inflation to facilitate adjustment, but an error, a very damaging error for the Biden Administration, but just an error nonetheless. And inflation expectations started dropping back to target levels when the Fed began raising the EFFR.
Real wages have indeed recovered and in principle could have risen so much as to constitute a new shock for monetary policy to deal with. But I do not think the “excess” over-target inflation should be attributed to the Fed trying to reduce real wage growth to sustain employment growth. Sometimes a cigar is just a cigar.
3. Whether getting PCE inflation down to the Fed’s 2% target -- discounting the slow-moving owner-occupied housing target, it is just about there already -- will result in modestly higher unemployment is an open question. It is, however, a mistake to _assume_ that achieving the target _requires_ higher unemployment. The low unemployment rate should play no role in the Fed’s decision as to when target inflation has been achieved. That would be to rely on the Phillips Curve that Nunes rightly rails against.
[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.]