Tim Congdon, writing at the Wall Street Journal, is concerned that the Fed, paying little attention to fundamentals, is underestimating the prospect of inflation:
The Fed has been dismissive of concern, describing the upturn in inflation as “transitory.†But it can’t deny that the forecasts it made in the spring and summer of 2020 missed the mark by a wide margin. Its main concern then, according to FOMC minutes, was that the Covid-19 pandemic would result in a long period of disinflation lasting “many years,†which would have to be countered by “accommodative†financial policies. In fact, the sequel to the pandemic is an inflationary boom.
Research at the Fed is dominated by the New Keynesian school. According to the New Keynesians, actual inflation is heavily influenced by inflation expectations, with some role for excess demand and supply (measured by the so-called output gap). New Keynesians—such as Richard Clarida, the Fed’s vice chairman—pay little attention to the quantity of money. Over the past remarkable 15 months or so of highly accommodative policies, the FOMC minutes haven’t once referred to any concept of the quantity of money.
The omission is all the more remarkable because June 2019 to June 2020 saw the highest increase in the M3 money aggregate since 1943, at 26%. (The M3 aggregate is no longer estimated by the Fed. The figure given here comes from the Shadow Government Statistics consulting firm, using information still made available by the Fed.) Avant-garde New Keynesians might pooh-pooh the comparison as irrelevant to the 21st century. Maybe so, but it can’t be overlooked that in the year leading to March 1947 consumer prices climbed by more than 20%.
The Fed was wrong a year ago, but forecasting errors are a defining feature of modern economics. Today, a case can be made that the Fed is underestimating the inflation risks in the balance of 2021. The FOMC’s latest verdict on inflation relies on inflationary pressures being markedly weaker in the last seven months of the year than they were in its first five months. That seems debatable. Perhaps the Fed has made a less forgivable analytical mistake.
Meanwhile, Paul Krugman is convinced it’s just right. I don’t know whether inflation will continue at the present or an increasing rate or whether it is, indeed, transitory as the Fed governors maintain. I do know that the increase in the money supply is unprecedented in my lifetime. And, as Al Jolson used to say, you ain’t seen nothing yet.
I also know that the pressure of inflation will fall hardest on the poor and those on fixed incomes, groups to whom it is hard to say “no” and inflation can’t be stemmed by spending more.







