Was Friedman Wrong?

Dr. Alan Blinder urges us to remain unconcerned about inflation in a Wall Street Journal op-ed:

Much of this year’s inflationary surge can be traced to two transitory factors: bounceback from the anomalous negative inflation readings of early 2020 and bottlenecks as the economy reopens unevenly.

One simple way to assess the importance of special factors is to consult the trimmed mean inflation series maintained by two of the Federal Reserve banks. These measures ignore the prices with the highest and lowest inflation rates and focus on the rest.

It turns out that the Dallas Fed’s trimmed mean PCE inflation rate over the past 12 months is 1.9%, and the Cleveland Fed’s trimmed mean CPI inflation rate is 2.6%. Not very scary. The high-inflation outliers—such as prices for used cars and energy—aren’t illusions, but they won’t persist.

A second inflation worry is that the U.S. economy, powered by pent-up consumer demand and huge government expenditures, will soon soar into the inflationary zone. Could be. But there are three counterarguments.

First, this worry reflects Phillips curve thinking, which hypothesizes that low unemployment rates make the inflation rate rise. But inflation wasn’t rising before the pandemic despite a 3.5% unemployment rate.

Second, the bond market isn’t buying the argument. Inflation forecasts embedded in bond yields remain consistent with the Fed’s low target.

Third, much of the extreme fiscal stimulus that has been driving spending is transitory. Most pandemic relief spending will be ending soon, and I don’t think Congress will approve much more spending this year that isn’t paid for.

The big question is how pent-up consumer demand will play out. American households socked away about $2 trillion in bank accounts as the pandemic raged. If that money gushes out, we’re likely in for some classic demand-side inflation. But if it gets spent gradually, American businesses will meet demand easily.

The third inflation worry is more subtle. Most of the supply-side bottlenecks, such as the shortage of computer chips, are global. Yet inflation is running higher in the U.S. than in other advanced economies. Is this evidence that we’ve used up the slack and are already “running hot”?

Milton Friedman famously remarked that “inflation is always and everywhere a monetary phenomenon” and I don’t think the astonishing increase in the money supply over the last year should be ignored. A question that Dr. Blinder does not address: does he think that the additional fiscal stimulus that the Biden Administration advocates is called for? No one can seriously maintain that it will not require creating additional money. And even advocates of Modern Monetary Theory do not argue that production can be extended beyond potential production using borrowed money. What if the additional potential short term production is zero?

4 comments… add one
  • Drew Link

    Typical Blinder sophistry, and it starts in the first paragraph you cite. Just a bounce back? Take a look at the FRED graphic:


    No one asks why, if its just a normal bounceback, “so why did we pour all that money in?” It would have bounced back anyway. And where did that money go? Stored now in mattresses? This goes to lag effects in inflation. Some may cite the notion that without the $ we would have spiraled down. How self serving. We had to pour money in so our ill conceived and marginally effective government policies didn’t burn the economy to the ground. But the money is out the door.

    As for the actual measures of inflation, all the problems are well documented.
    Hedonistic and substitution adjustments are custom made for mischief. But that would never happen, right? What with SS payments and TIPS borrowing as a motivator……………..well.
    I mean the FBI would never………..uh, never mind.

    Core vs actual PCE anyone. Excluding food and energy? Really. No one buys food and energy, right? Food is a commodity – a real measure of inflation. And energy is largely Biden policy driven. Convenient. Transitory my ass. And then the rent vs buy issue.

    Using bond yields to prove his point? Really? Play with this graphic.
    Looks to me like a sharp rise on the order of 2.5x.


    And we haven’t even gotten to historical empirical evidence. But this time is different…………..

  • CuriousOnlooker Link

    In the end; what matters to the transitory argument is “how long” and “how much”?

    If inflation peaks at 5% and reverts by end of 2021, then there won’t be a lot of complaints. If it peaks at 20% it takes until end of 2023 to revert; we won’t be talking about anything else.

    Amusingly, not a lot of experts are willing to put hard predictions out there on those two questions, perhaps because they are observing Proverbs 17:28.

  • Grey Shambler Link

    Is Jamie Dimon wrong?
    Why hoard cash unless you expect it’s value to rise?

  • Grey Shambler Link

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