This will be the last I write on it for a while, I promise.
I don’t want this newsletter to be an all-inflation-all-the-time thing, and I feel reasonably sure that you don’t want this newsletter to be an all-inflation-all-the-time thing either, and so I will do my best not to write about inflation any more, for a while at least, unless something really extraordinary happens. My feeling is that inflation will remain high into 2022, when we are likely to see a deceleration back towards the target, though we might not get to 2% until 2023. I think we might get two Fed rate hikes next year rather than the one they’ve been preparing us for, but I don’t think the Fed will need to massively push up its tightening schedule in order to engineer a deceleration in inflation. Indeed, the biggest risk posed by inflation is that it spooks the Fed into tightening too fast.
But look, a 6.2% increase in consumer prices over the past 12 months is without question something that is uncomfortable for many people. It’s also more inflation than I thought we’d get early this year. To some extent, the unexpectedly high rate of inflation is just about one-off weirdness across the global economy. The energy component of the consumer price index is up 30% year-on-year, for instance, in no small part because economies in Europe and Asia have been scrambling for supplies of gas and coal. It happens; what can you do. But core prices are also up 4.6% year-on-year. There’s inflation out there, and there’s no denying it.
Is this inflation the consequence of a terrible policy mistake? It’s not hard to find people arguing on Twitter that: yes, it is. Most people making this argument say that Democrats passed too large a stimulus bill early this year, given how the economy was recovering. Instead, they reckon, the Dems should have passed something smaller and more targeted, or spread over a longer period, or with more automaticity—meaning that spending would in some way be linked to the state of the economy, such that a faster recovery would result in less money going out the door and a slower one would result in more. But instead Democrats did more or less what they had told voters they would, and then there was too much money chasing too few goods and the result has been excessive inflation.
How should we think about these arguments? One thing to consider is that things were politically hairy early this year; that as far as American democracy goes, a lot was (and is) riding on Democrats winning elections in 2022 and 2024; and that there was thus a strong political case for delivering on election promises and putting money in people’s hands. I think that was a reasonable set of views to have held earlier this year, though of course matters look a bit different now in the aftermath of this year’s elections.
In terms of the economics, we were earlier this year and remain in a pandemic. Indeed, the pandemic has claimed more lives over the past 12 months, both globally and within the US, than were lost during the first year or so in which the virus was circulating. To me, insuring against downside risks by passing a giant stimulus isn’t a bad bet. Maybe the continued circulation of new variants of Covid ends up being really disinflationary or triggers other shocks which depress demand. In that case, you’ll be glad to have had so much money in the pipeline. And if you’re wrong? Then you end up with some inflation, but what a substantially better problem to have than a very weak and slow economic recovery.
Hanging over these points, however, is the possibility that some other policy mix might have been available which delivered most of the upside with meaningfully less downside. So, is there?
This is where the carping about inflation really irks me, because I’m not so certain that there is. As noted before, consumer prices are up 6.2% over the past 12 months. It is also the case that real GDP (adjusted for inflation) is up 5% over the past 12 months, and employment is up by about 5.8m jobs. The American economy, notably, has surpassed its pre-pandemic level of economic output while other rich economies, like the euro area, have not. Even so, consumer prices in the euro area have risen by more than 4% over the past year, which is a lot, especially if you’re a German.
Had there been less American stimulus, there would have been less inflation, but there would also have been less growth in output and employment. It is possible that less stimulus might have meant a lot less inflation and only a little less of the other stuff. But on the other hand, unemployment is much costlier than inflation, so you really would need quite a lot less inflation for not much less employment growth to break even, so to speak, relative to the reality in which we find ourselves.
Furthermore, America managed its impressive 12-month performance despite an absolutely miserable third quarter in which the delta variant seriously depressed both growth and hiring, while also of course claiming about 2,000 American lives per day over a stretch of more than a month. But for the delta outbreak, growth in output and employment would almost certainly have been higher and inflation might well have been lower. But we are likely to get at least some of that lost output and employment growth back in the months ahead, which suggests that comparisons between the US economy and other rich countries may well look more favorable a year from now than they do today.
What the autumn experience really ought to drive home, though, is that there are no magical alternative realities in which everyone is happy, because we remain in the midst of a fucking pandemic. Inflation sucks, and it’s a shame that people have to deal with it, and if you’re Joe Biden you can’t just call a press conference and tell people to chill out because if they weren’t mad about inflation they’d just be mad about something else. But if they weren’t mad about inflation, they would just be mad about something else. They might be upset because they have less money in the bank, or because job growth is slower, or because the debts they owe are more burdensome given disappointing income growth.
Or they might just be mad because they still have to worry about getting a dangerous virus—in part because lots of their fellow citizens don’t want to get vaccinated—or because people they know and love are seriously ill or dead thanks to Covid. If we weren’t still in the middle of a pandemic which is killing about 25,000 people a day worldwide, then we could have a different macroeconomic conversation about what is possible and what is ideal and who should have done what. But we are. And given that we are, one has to consider that where America is, macroeconomically speaking, is probably not miles away from what was realistically the best possible place we could have been.