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.
There are different meanings to transitory inflation.
They could mean a change in the price level could be transitory; or a change in the rate of the price level is transitory; but a permanent change in the price level occurs.
Indeed, if you take a long enough timeframe, even episodes of hyperinflation are transitory — Germany’s transitory inflation was 1914-1924.
How this inflation is perceived is how long, the level of change in the price index, and the fiscal situation of government/country at the end.
Not that high inflation (even as high as 20% CPI inflation) must be disastrous. In the 1940’s there were 3 inflation spikes as high as 12%, 20%, 10% yet the economy was considered good. During WWI and right after (1916-1920), inflation was 15%+, a few years later the roaring 20’s started.
Those are the two time periods most like now considering the fiscal situation of the government, and with similar disruptions to the economy due to an extraneous shock.
“Meanwhile, Paul Krugman is convinced it’s just right.”
A guy who’s never seen a government spending program he didn’t like thinks so. Who’d a thunk it?
“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.”
And this is where the cruelty and cavalier attitudes on the left become evil. For many of these people this is the last chance. 6-10 years of 5-10% inflation will represent the majority of the balance of their lives, and fundamentally alter their financial capacity. They lived responsibly: saving, living within their means and managing their assets in an age appropriate fashion. Then some politician or academic comes along and decides that free beer for the (mostly younger) irresponsible and profligate is good politics, or gets them a cushy administration, future lobbyist, think tank or editorial board gig.
You know, there is something to be said for the guillotine.