Persistent inflation was easy to predict from a basic IS-MP analysis with wealth effects, fiscal policy, and multipliers. The driving force is demand >> supply and this will remain so unless house and stock prices come down or supply recovers a lot 1/4
https://twitter.com/alpsimsek_econ/status/1418290116469084165
The question is not why we had inflation but whether it can be optimal monetary policy to allow for some inflation in these circumstances. In fact, there is one argument for having some overheating and inflation
2/4
2/4
Since spending/aggregate demand has inertia, current monetary stimulus raises spending next year. If one thinks supply bottlenecks are large and will resolve next year (and that’s a big if), then some overheating now can be useful as it can speed up the recovery going forward 3/4
While this can qualitatively explain some overheating and inflation, my sense is the Fed has overdone it. House and stock valuations are substantially elevated even compared to before Covid. They need to come down somewhat
I continue to think the Fed should taper much faster 4/4
I continue to think the Fed should taper much faster 4/4
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