From last week’s GDP release.
Current-dollar GDP increased 7.8 percent at an annual rate, or $432.5 billion, in the third quarter to a level of $23.17 trillion. In the second quarter, GDP increased 13.4 percent, or $702.8 billion
If Scott Sumner has converted you to following nominal GDP, then this is looking inflationary. Indeed, Scott himself says,
My only fear is that we might overshoot. NGDP growth was at an annual rate of 7.8% in the third quarter, which is fine when recovering from a recession. But we wouldn’t want growth to continue at that clip going forward. The Fed needs to bring NGDP growth down to a level of roughly 4%, to insure it can meet its FAIT objectives for the 2020s. The TIPS spreads have me a bit worried.
FAIT stands for flexible average inflation targeting.
Tyler Cowen continues to have faith (even more than Scott!) that the Fed has the will and the means to stop inflation in its tracks. As you know, I take the contrary position.
Being an “old” (97 going on 98) guy, my academic background leaves me wondering: since when has it become the purview of the Fed to “manage the economy?”
Accepting the linkages among the “effects” of managing the largely credit aspects of the monetary system is not the same as attempting to determine those effects.
Let’s say the Fed decides to raise its average inflation target to 3% per year as opposed to 2% because it believes that causing a recession in 2022 or 2023 is worse than letting inflation average more than 2%. What happens then?
I am thinking that a central bank needs an inflation target higher than 2% if they are going to be credible. Because 2% doesn’t provide enough flexibility to deal with negative supply shocks, where you want higher employment and higher inflation as opposed to higher unemployment and hysteresis.
Good questions.
For that matter, the Reserve Bank of Australia has a 2% to 3% inflation target, and the People’s Bank of China “about 3%.”
Why 2% became sacred….who knows.
Does any particular inflation rate matter all that much?
The average inflation rate from 1948 to 1965 was 1.6%, and if I recall correctly those were pretty good years for labor. The average inflation rate from 1982 to 1995 was 3.6%, and real wages steadily declined over that period.
There’s a lot more to the picture than inflation.
Meh. Inflation-schmuflation.
Suppose inflation as measured on the CPI runs at 4% to 5% for a few years. Big deal.
Something wonderful is happening in America and that is called rising real wages. Why is this tremendous accomplishment not being acknowledged?
A troubling question: can inflation only be held down through stagnant wages and declining labor shares of income?
Real average hourly earnings decreased 0.8 percent, seasonally adjusted, from September 2020 to September 2021.
Good point…but you refer to average wages.
It sure seems like Starbucks, Amazons and Costcos etc are raising wages.
I suspect the lower quadrant is doing better. I wonder if this shows up in stats somehow?
ASK-
BTW, the chart you reference does show real average hourly earnings rising in July, August and September—in other words, lately.
Time will tell.
Add on:
If wages are depressed by the CPI, they may not show the same rate of increase as wages depressed by CPI core.
Related, the BEA release also stated:
“ Disposable personal income decreased $29.4 billion, or 0.7 percent, in the third quarter, compared with a decrease of $1.39 trillion, or 25.7 percent, in the second quarter. Real disposable personal income decreased 5.6 percent, compared with a decrease of 30.2 percent.” If one bought into the aggregate movements game, this might suggest lower consumer spending projections and less demand side inflationary pressure.
My parents worked and saved their whole lives to retire and you are stealing it.
Well, not me personally!
Also, anyone can invest in gold, TIPS, property, stocks and so on, made easier and safer than ever through ETFs.
Transaction costs have been trimmed to near zero.
I wish your family the best.
That we can index our way out of inflationary costs — I don’t find that a compelling argument. There will always be winners and losers.
Why not just have a non-inflationary economy that accurately accounts for growth?
It is called Japan.
I think the conventional argument is that wages are seldom reduced because it will induce resentment and shirking. That means in many cases there is a wage ratchet effect. In more extreme individual or economic circumstances there will be involuntary unemployment but what if the circumstances are not extreme? If not extreme, then some inflation does reduce the real labour cost without inducing as much resentment and shirking.
Thus inflation makes wages flexible in both directions. Since most other prices in the economy are flexible in both directions the wage ratchet anomaly is mitigated.
Why not just have a non-inflationary economy that accurately accounts for growth?
Because most economists (and central bankers) believe that an economy with no inflation will be stagnant and show little growth, due to wages being inflexible downward. However, there is a sweet spot around 2% where people will still be fooled that their nominal wage is their “real” (inflation adjusted) wage. The economy will grow and inflation won’t increase. It will be “non-accelerating” and under control. Tim Harford’s The Underground Economist Strikes Back: How to Run–Or Ruin–An Economy is a wonderfully written explanation of why many think that way, along with various other ideas.
The bond market isn’t buying it, and hasn’t been buying all along.
That is the way I am betting, too.
Isn’t the bond market’s opinion hard to know since the Fed has purchased trillions via the latest round of QE?
What do you think would happen to the bond market if the Fed announced it was reducing its balance sheet to December 2019 levels by the end of 2021?
It’s hard to say what the “market” is saying about inflation because every asset except bonds is signaling inflation.
Bonds have been correct my entire lifetime- even the last 13 years after QE started up the first time.
If I compare:
1) Putting my savings into bonds and renting
vs
2) Putting my savings into a down payment on a home with a 30 year mortgage.
I’m pretty sure that #2 would have come out way way way ahead.
Similarly, if an investor was consider holding bonds versus holding stocks the answer would be obvious to, the post facto risk premium would be enormous.
So I don’t know if “bonds have been correct” is quite right. Anyone holding bonds fell way way behind.
Bonds were correct in part because they were so hideously wrong in the 1960s that the bond risk premium became huge by the 1980s, and it took about two decades and change for that to be worked out of the system.
I haven’t done the math, but I’m pretty sure that the real after-tax return to a moderate duration treasury portfolio (say 33% 3 month, 33% 5 year and 33% 10 year) has been terrible for the past 13 years – perhaps not really losing money, but not really making any either.
There seems to be a lot of complacent assurance that inflation can not only be roughly determined but fine-tuned by the Fed. Inflation is a complex phenomenon and when inflationary assumptions take root they drive further inflation as people rush to spend to get ahead of price increases. What it took to stop it in the Volcker era was brutal. I don’t think anybody has the stomach for that. Federal debt is so large that super high interest rates would swallow the whole budget. The private sector is replete with deals based on very low interest rates. The economic disruption would be catastrophic.
My fear is that inflation is either low and stable, or rises progressively and uncontrollably. I fear we are headed for real trouble.