Should we worry about this? Eric
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July 17, 2021
Good morning. Inflation is running higher than expected. Should you be worried?
In today’s newsletter, we ask experts to weigh in.
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[https://static01.nyt.com/images/2021/07/16/business/DB17-newsletter/DB17-newsletter-articleLarge.png]
Illustration by the New York Times; Photo by Mike Segar/Reuters
Should you worry about inflation?
Fresh data this week showed that consumer prices continue to
increase<https://na01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fnl.nytimes.com%2Ff%2Fnewsletter%2FAbtHMukyZAW07VY6LWgDMw~~%2FAAAAAQA~%2FRgRi1UuHP0TpaHR0cHM6Ly93d3cubnl0aW1lcy5jb20vMjAyMS8wNy8xMy9idXNpbmVzcy9lY29ub215L2NvbnN1bWVyLXByaWNlLWluZGV4LWp1bmUtMjAyMS5odG1sP2NhbXBhaWduX2lkPTQmZW1jPWVkaXRfZGtfMjAyMTA3MTcmaW5zdGFuY2VfaWQ9MzU1OTkmbmw9ZGVhbGJvb2smcmVnaV9pZD0xNTQzNjE2NzQmc2VnbWVudF9pZD02Mzc1MCZ0ZT0xJnVzZXJfaWQ9OWY4MjJmN2RkNmNkODg4OTUwYjc1NjViNzVjZmY2NGNXA255dEIKYO6HxvJg-JKuFlIYZXJpY3BydXNzZWxsQGhvdG1haWwuY29tWAQAAAAA&data=04%7C01%7C%7C0ba26e5e584b4317c7d108d9491a923e%7C84df9e7fe9f640afb435aaaaaaaaaaaa%7C1%7C0%7C637621200747712360%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C1000&sdata=ZClDtaPePaD2F6tvNs8DYoYC2tFuJZ6lpAH8oRLXtIY%3D&reserved=0>
at the fastest pace since 2008, and are moving up more rapidly than many
economists, including those at the Federal Reserve, expected. The jump is
clearly tied to the economic rebound from the pandemic.
What is less clear? When today’s fast inflation will fade, and by how much.
Most policymakers say their best guess is that prices will settle down as
businesses move past a summer burst and supply catches up with consumer demand.
They also point out that global forces have dragged inflation lower for years.
But some economists, and many Republicans, warn that today’s quicker increases
could change consumer and business expectations, making it more likely that
rapidly rising prices are here to stay. That could force the Fed to pull back
its support for the economy to slow demand and to keep inflation under control,
possibly plunging the economy back into recession.
Which side is right — the sanguine or the fretful — will prove hugely
consequential for everyday Americans. Inflation can make debts easier to pay
off and can give workers room to negotiate for higher wages. But it can also
erode purchasing power, deplete savings and, if it is severe enough,
destabilize entire economies.
“We’re experiencing a big uptick in inflation, bigger than many expected,
bigger certainly than I expected,” Jerome H. Powell, the Fed chair, told
lawmakers this week. “We’re trying to understand whether it’s something that
will pass through fairly quickly or whether, in fact, we need to act.”
Mr. Powell listed reasons to expect price pressures to fade: The data have
popped thanks to statistical quirks and the end of lockdowns. But he also made
clear that the moment is uncertain, and that “we’re humble about what we
understand.”
DealBook asked experts in economics, former government officials and critics of
leaders’ current policies if they’re worried about the path ahead for
inflation. — Jeanna
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Austan Goolsbee: Temporary supply issues are to blame.
Mr. Goolsbee is a professor of economics at the University of Chicago Booth
School of Business.
I lean Team Temporary. Economists call the “potential” of the economy the
output it can sustain at full employment. When the economy gets above potential
output — as it seems imminently in danger of — it’s time to think about
overheating.
The amount we exceeded potential output in the 1960s, which helped ignite more
than a decade of inflation, was much higher than what it is now and remained so
for almost eight years. Our situation looks more like the situations in the
late 1990s, the mid-2000s, and 2017 to 2019, none of which ignited sustained
inflation despite unemployment rates well below today’s.
[https://static01.nyt.com/images/2021/07/17/business/17db-potentialgrowth3/17db-potentialgrowth3-articleLarge.png]
This suggests temporary supply chain issues unless something about the pandemic
fundamentally changed the sustainable rate of employment in the economy.
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If the virus rages back, the talk of overheating could be moot. But if
temporary inflation is a sign that we are headed back to a growing G.D.P. with
rising wages and plentiful jobs, what’s the scare in that?
[https://static01.nyt.com/images/2021/02/18/business/dealbook-icon-dollar-up/dealbook-icon-dollar-up-articleLarge-v5.gif]
What business leaders are saying:
* “Will inflation be transitory? There are many reasons that the peaks
we’ll see at the moment will be. But what’s the longer-term trend? That, I
think, everyone will be keenly watching. We think the jury is out.” — Jane
Fraser, chief executive of Citigroup
* “Is there somewhat more inflation out there? There is. Are we going to be
pricing to deal with it? We certainly are.” — Hugh Johnston, chief financial
officer of PepsiCo
* “I don’t think it’s all going to be temporary, but that doesn’t matter if
we have very strong growth.” — Jamie Dimon, chief executive of JPMorgan Chase
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Laura Rosner-Warburton: Inflation is tied to the global pandemic.
Ms. Rosner-Warburton is a senior economist and founding partner at MacroPolicy
Perspectives.
The effects of fiscal support are already fading, which should reduce demand
and lessen upward pressure on prices. Absent strong fiscal support, consumers’
price sensitivity should return. Meanwhile, supply and production are
expanding, easing some of the shortages of key items whose prices have risen
sharply.
In short, this year’s burst of inflation is very closely tied to the
unprecedented events surrounding the global pandemic and not the start of a new
regime in inflation dynamics.
Glenn Hubbard: ‘Transitory’ doesn’t mean anything.
Mr. Hubbard is dean emeritus of Columbia Business School.
The way I think about inflation is: What would happen if I’m wrong in my
outlook? The Fed frames it as follows: “If we tighten too early, we’re going to
lose jobs and wage gains, particularly for vulnerable people. And if we tighten
too late, there’s inflation. But we are watchful and have tools. We won’t be
too late. By the way, the markets believe us because inflationary expectations
are steady. So we’re fine.”
But that’s not how I see it. And that’s why I’m worried. Thinking about it as a
risk management problem, if the central bank doesn’t take its foot off the
accelerator gradually now, it may have to slam on the brakes later. And if I
were Chair Powell, I would tell people what the Fed really thinks, taper bond
purchases and then tell people when the Fed plans to tighten.
My worry is, if the Fed doesn’t do this approach, it risks either a recession
or financial instability, because of bubbling-over housing markets or excess
risk taking.
The problem with saying inflation is “transitory” is that there’s no definition
there. I mean, in the eyes of God, my life span is temporary. What is
transitory?
Jason Furman: Inflation will remain higher than expected, and that’s OK.
Mr. Furman is a professor of economic policy at Harvard University.
I think inflation is going to slow dramatically from its recent pace. But its
recent pace has been so high that even after it slows, it could easily settle
down at something more like 2.5 to 3 percent rather than the 2 percent that the
Federal Reserve and most forecasters are expecting. I don’t view that as a huge
problem. I think there are some advantages to having higher inflation.
But I worry about three things. Number one, if the Fed overreacts in trying to
get rid of the inflation, it could cause a recession. Number two, when events
happen that no one is expecting, it creates turbulence in financial markets.
Right now, financial markets are betting that inflation is going to go back to
2 percent. If that turns out to be wrong, financial markets will need to
reorient themselves. And usually that works fine, but sometimes it ends up
hurting the economy. And finally, when you have surprise inflation, it tends to
do things like take away from the purchasing power of workers.
[https://static01.nyt.com/images/2021/02/18/business/dealbook-icon-dollar-up/dealbook-icon-dollar-up-articleLarge-v5.gif]
Since World War II, there have been six periods when inflation surpassed 5
percent:
* July 1946 to October 1948: Supply shortages and pent-up demand
contributed to postwar inflation.
* December 1950 to December 1951: As the Korean War started, consumers
stockpiled goods.
* March 1969 to January 1971: A booming economy drove price increases.
* April 1973 to October 1982: Oil prices surged, twice.
* April 1989 to May 1991: The first Persian Gulf war led to an increase in
oil prices.
* July to August 2008: Gas prices skyrocketed.
[https://static01.nyt.com/images/2021/07/17/business/17db-inflation/17db-inflation-articleLarge.png]
Of these six periods, the White House argues the first is the most relevant.
“Not surprisingly, supplies were running low or were exhausted entirely during
the war,” a group of economic advisers wrote
recently<https://na01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fnl.nytimes.com%2Ff%2Fa%2Flh-FDygKSipAmm7vgMDlAQ~~%2FAAAAAQA~%2FRgRi1UuHP0T1aHR0cHM6Ly93d3cud2hpdGVob3VzZS5nb3YvY2VhL2Jsb2cvMjAyMS8wNy8wNi9oaXN0b3JpY2FsLXBhcmFsbGVscy10by10b2RheXMtaW5mbGF0aW9uYXJ5LWVwaXNvZGUvP2NhbXBhaWduX2lkPTQmZW1jPWVkaXRfZGtfMjAyMTA3MTcmaW5zdGFuY2VfaWQ9MzU1OTkmbmw9ZGVhbGJvb2smcmVnaV9pZD0xNTQzNjE2NzQmc2VnbWVudF9pZD02Mzc1MCZ0ZT0xJnVzZXJfaWQ9OWY4MjJmN2RkNmNkODg4OTUwYjc1NjViNzVjZmY2NGNXA255dEIKYO6HxvJg-JKuFlIYZXJpY3BydXNzZWxsQGhvdG1haWwuY29tWAQAAAAA&data=04%7C01%7C%7C0ba26e5e584b4317c7d108d9491a923e%7C84df9e7fe9f640afb435aaaaaaaaaaaa%7C1%7C0%7C637621200747747294%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C1000&sdata=NnXLeEAO1wZC8WuQzWruedo9a7udvERAhFG9sYgDjLU%3D&reserved=0>.
“Today’s shortage of durable goods is similar — a national crisis necessitated
disrupting normal production processes.”
Inflation during that period declined after supply chains normalized and demand
leveled off, and the White House argues the same could happen with today’s
inflation, too.
Christina Romer: The lesson of past inflation is to remain flexible.
Ms. Romer is a professor of economics at the University of California, Berkeley.
Like most economists and policymakers, I expect much of the rise in inflation
to be temporary. Many pundits invoke the experience of the 1960s and ’70s as a
cautionary tale for the current era. They are particularly worried that
inflation expectations, which have been low and steady for the last four
decades, could become “unanchored” and rise quickly. While it is true that
inflationary expectations rose in the 1960s and ’70s, it took many years of
above-normal growth and actual inflation to push up inflationary expectations
and start a wage-price spiral.
The more important lesson from the 1960s and ’70s is that we need to remain
flexible in our thinking. Like today, policymakers in that earlier era
frequently cited temporary factors — droughts, oil price spikes and union
activity — as the source of inflation. In fact, however, they were facing very
persistent, demand-fueled inflation. If the inflation numbers today don’t
settle down as the recovery progresses, we will need to quickly admit that we
were wrong and that the inflation is of a more worrisome kind.
Robert Shiller: Stop making the same mistakes.
Mr. Shiller is a professor of economics at Yale University.
Inflation rewards debtors and hurts creditors. It tends to help young
homeowners, since they tend to be debtors, at the expense of older people, who
may be living off pensions that are not fully indexed to inflation.
The “great inflation” that came to an end after Paul Volcker took the helm at
the Fed in 1979 was a national tragedy for its impact on pensioners and
minimum-wage earners, since the minimum wage was also not adequately indexed to
inflation.
People don’t demand indexation often enough, and poorly understand inflation.
Irving Fisher, a professor of economics at Yale, wrote a book in 1928, “The
Money Illusion,” that described popular misunderstandings of inflation. People
are still making the same mistakes almost 100 years later, and these mistakes
contribute to income inequality. They also create a feeling of ill will, and
this social discord creates problems for all of us.
Josh Bivens: The Fed’s reaction to inflation could be worse than inflation
itself.
Mr. Bivens is the director of research at the Economic Policy Institute.
Rising prices can certainly squeeze families’ budgets, all else equal. But
recent inflation has been driven by price spikes in a small number of sectors,
such as used cars, hotel rooms and airfares. Inflation driven by idiosyncratic
sectoral shocks should not spur policymakers to stomp on the brakes.
The only inflation that should spur more contractionary macroeconomic policy is
inflation that comes from the labor market, when jobs become so plentiful that
workers can successfully demand wage growth that runs far ahead of the
economy’s capacity to deliver it. This has not happened in the United States
for a long time.
Inflation hawks might argue that this is because the Fed successfully stayed
ahead of the inflation curve. But too often the Fed has cut recoveries short
before wages for most U.S. workers saw decent growth. In a recent
study<https://na01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fnl.nytimes.com%2Ff%2Fa%2FzI3XPT-xf3guPOFh20am7Q~~%2FAAAAAQA~%2FRgRi1UuHP0TcaHR0cHM6Ly93d3cuZXBpLm9yZy91bmVxdWFscG93ZXIvcHVibGljYXRpb25zL3dhZ2Utc3VwcHJlc3Npb24taW5lcXVhbGl0eS8_Y2FtcGFpZ25faWQ9NCZlbWM9ZWRpdF9ka18yMDIxMDcxNyZpbnN0YW5jZV9pZD0zNTU5OSZubD1kZWFsYm9vayZyZWdpX2lkPTE1NDM2MTY3NCZzZWdtZW50X2lkPTYzNzUwJnRlPTEmdXNlcl9pZD05ZjgyMmY3ZGQ2Y2Q4ODg5NTBiNzU2NWI3NWNmZjY0Y1cDbnl0Qgpg7ofG8mD4kq4WUhhlcmljcHJ1c3NlbGxAaG90bWFpbC5jb21YBAAAAAA~&data=04%7C01%7C%7C0ba26e5e584b4317c7d108d9491a923e%7C84df9e7fe9f640afb435aaaaaaaaaaaa%7C1%7C0%7C637621200747752283%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C1000&sdata=2k8RaucV5xqKN%2B5H0xGmKxbrITBdRCTYy1h7lawObRA%3D&reserved=0>,
we estimated that too-austere macroeconomic policy is the most important
reason for anemic wage growth seen by the vast majority of U.S. workers after
1979.
So, recent inflation is a little worrisome, but an inappropriate response to it
is very worrisome.
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What do you think? Will high inflation stick around or fade away? Let us know:
dealbook@xxxxxxxxxxx<mailto:dealbook@xxxxxxxxxxx?Subject=Inflation>.
