Thread by @DianeSwonk

This week jobs, next week inflation for April.

#Inflation will be hot - y/y will easily exceed 3%, could nip at 4%, strongest since 2011.

Some will use the term “stagflation” which was coined in 1973-75 recession to describe ⬆️ inflation & ⬆️ unemployment. That will be wrong.

A good part of the y/y increase is due to what are termed “base effects,” a sharp downdraft in many prices a year ago. Oil prices fell into negative territory in April 2020 - yes, negative. Producers had to pay buyers to store oil they suddenly did not want in lockdowns.

Bottlenecks worsened during the pandemic. Safety protocols forced factories to stagger worker’s shifts and slowed the process of ramping up. An unexpected surge in demand for goods as those who could bought anything they could to ease the stress of isolation.

Shortages in the computer chips - and go into nearly everything we buy now are particularly acute. Most made in Taiwan. Vehicle produced had to idle production - & cut employment in Mar & Apr - despite soaring in demand.

Shipping containers, that were stranded during lockdowns, were suddenly in short supply as trade roared back. Transportation systems already stressed by shift to online shopping were further strained. Inventories plummeted and shortages mounted.

The Ever Given, the ship the size of the Eiffel Tower that got stuck in the Suez Canal, added insult to injury. Delays compounded in critical components and goods coming in from abroad, while backlogs at US ports mounted. Ships waited weeks to dock & be unloaded.

Related problems cause shortages and surge in commodity and lumber prices. Lumber one of most dramatic. Widespread industry consolidation post housing bust in 08-09, tariffs, and climate change 🔥eliminated whole forrests, as demand jumped for home, additions, repairs & furniture

Now, starting to unleash pent-up demand in services. Stimmy checks goosing that demand along w demand for big ticket items like vehicles. This is boosting hotel room rates, airfares, costs of dining out, even as consumers slow pace of spending at grocery stores.

We are also buying clothes again to replace all those pajama bottoms and slippers many who could work from home improvised with as work wear as they worked from home. And, we are rushing to catch up on medical and dental visits delayed by the pandemic.

All those things will push up inflation measures both month-to-month and y/y in April. Now match those gains w/ weak employment report, with rise in unemployment measures in April and the temptation w be to declare this a repeat of the 1970s. Very unlikely.

Inflation nearly tripled in 1960s before 1970s began. Then in 1971, Nixon admin did some politically popular but what were in hindsight incredibly economically costly policies for re-election in 1972. Allen Greenspan in a memo that inflation would get much worse.

They: invoked wage and price controls, which did neither; levied a 10% tariff on all imports; abandoned gold standard, which triggered ⬇️ in $ AND put enormous political pressure on their Fed Chair, Arthur Burns to ease policy, when inflation was a problem. (There are tapes.)

Blue and white collar worker had cost of living adjustments (COLAs) based on the CPI into their contracts - what the unions got everyone got back then.

In 1973, OPEC cartel formed and cut oil production, and became the straw that broke the camel’s back.

A vicious cycle of wage-push inflation broke out, which was not tamed until Paul Volcker became Fed Chair under Prez Carter and broke the back of inflation with high double-digit interest rates and two back to back ugly recessions in 80 and 81-82.

Hard to generated a repeat w/o policy mistakes of 60s & 70s. Workers don’t have that bargaining power. Bottlenecks in production expected to abate in 2nd half 2021/early 2022. Service sector bottlenecks will take longer but pivot in spend out of goods to services should help.

Finally, pent-up demand in services not the same as that for goods. Haircuts lost to lockdowns are not replaced. Everyone can’t take vacations at once, esp given 4-decade drop in paid vacation leave. Could exacerbate inequality as we enter boom.

All this doesn’t mean I am not worried ab inflation, I am. I am just not as worried as others. Shortcuts on those worries are dangerous.

@federalreserve would rather risk a little warmth than leave those stranded in pandemic out in cold on the sidelines./Fin