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The burst of inflation this spring has obviously meant one thing: the end of the “end of inflation.”
For 25 years, inflation seems to have been on a downward trend. Those of us who worry about it seem to be the bearers of the end of the world and cannot leave the 1970s behind. It is difficult to buck the trend. A famous economist suggested that I give up studying inflation-inflation is 2%, he said, that’s all you need to know. Obviously a new natural constant.
Well, obviously not. Inflation can happen, and there is inflation economics. It is now obvious-natural and man-made supply constraints, coupled with strong demand.
No one is really sure where it will go.see IGM surveyIt is a good indication of how broad a wise consensus has been reached on this issue.Maybe these Yes It is only a temporary shock, a supply bottleneck, and a one-time price increase after the stimulus. Perhaps this was the beginning of the 1970s, when it provided the exact same excuse.
I will summarize the bottom line of my thinking about this issue.
1) The dynamics of inflation are roughly
Inflation = expected inflation + inflationary pressure
If people expect higher inflation next year, then sellers will raise prices faster, and buyers will pay higher prices faster. The correct measurement of inflationary pressure is more controversial. The unemployment rate or GDP gap (you will see the Phillips curve here) is a very bad measure. Choose too low interest rates, too much money, or too much debt and deficits set by the Fed. In either case, if the expected inflation remains “anchored”, once the pressure disappears, inflation will quickly rebound. If not, we are in trouble because we must suppress the expected inflationary spirit. The Fed seems to think that the “anchor” expectation comes from a soothing speech about the degree of expectation anchoring. In the worst case, they may say that if inflation breaks out, they have “tools” to control inflation, but they rarely say what these tools are.I believe expectation comes from expectationaction
, Rather than speaking, and better from strong institutional rules and promises that will force necessary but unpleasant actions when needed. At the very least, one must believe that if this is involved, the Fed is willing to repeat the mistakes of 1980. It will be more difficult to raise interest rates now, a) 100% debt/GDP, instead of 25%, so higher interest rates will immediately hurt the budget b) huge reserves, so the Fed will be seen as paying surprises to big banks that don’t lend Fortune c) If interest rates rise, banks that are too big to fail will lose a lot of money. d) The current emphasis on inequality, because the recession will cause the most damage to the most vulnerable.
2) In today’s economy, in the end, when people don’t believe that the government will repay their debts, inflation will come. In addition to interest rates, the Fed also changed the composition of government debt—reserves and national debt—but did not change the amount of debt. It doesn’t matter whether we hold Treasuries directly through the world’s largest money market fund (this is the Federal Reserve) or directly. Inflation does not only come from debt, but from debt related to credible plans and expectations that debt will be repaid.The basis of expected inflation is the belief that if inflation gets out of control, our government will take immediate measuresfiscal
And the currency room is in order. In addition, because our government tragically borrowed short-term debt, inflation will come when people believe that others will lose that confidence. It is not difficult economically to organize the fiscal sector-tax laws and rights reforms that directly promote growth. But our government has promoted this possibility for nearly 40 years, and absolutely no one wants to do so. It may have to emerge after the crisis, which will be more difficult.
As a short-term forecast, none of these are very useful, I will not provide them. At this moment of “system transformation,” fiscal and monetary policy expectations are both unstable. In the tradition of rational expectations, they have not been well anchored by decades of “system” experience. I can summarize the forces at work, but these forces only emphasize the difficulty of prediction. If someone can tell you with certainty that we will have inflation next year, then we already have inflation today.Logic of
Just like the logic of a bank run or a stock market crash. No one can predict inflation well is proof of this theory.
This sudden increase may pass, and expected inflation, which reflects confidence in the ultimate soundness of US fiscal and monetary policy, will remain stable. This sudden increase may quickly undermine this belief. But at least this issue has reappeared, and it is a useful economic analysis and debate issue. This is certain: the “end of inflation” is coming to an end.
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