Some further thoughts on inflation and what to do next. Inflation has of course come in much higher than Team Transitory predicted — the Fed was predicting only 2.4% PCE growth as late as March. So the inflation worriers have in a way been vindicated, but ... 1/
The details of what's happened are very different from what they predicted early this year. 2/
Olivier Blanchard offered an admirably clear exposition: stimulus would lead to a huge surge in demand above capacity 3/ piie.com/blogs/realtime…
But demand *hasn't* risen all that much: real domestic final spending up 3.8% in 2 years, roughly consistent with normal potential growth 4/ 
What's happened instead is that potential is lower than we would have expected, thanks to Great Resignation; employment still low but all signs say labor market very tight 5/
So economy may be overheated given that. But everything we knew before said that this should have only a modest effect on short-term inflation 6/
In fact, labor market tightness seems to be only a modest contributor to overall inflation so far 7/
If you believe the BIS, supply-chain issues and resulting bottlenecks are a much bigger factor 8/bis.org/publ/bisbull48…
These largely reflect not so much overall level of demand as its skew toward goods as opposed to services — which I don't think anyone saw coming 9/
Historical interpretation aside, what does this say about future policy (it's all about the Fed now)? Should the Fed tighten to bring inflation down? 10/
The problem with this argument is that to the extent that this is about bottlenecks, you're basically saying that the whole economy should be held back by the most constrained sector 11/
This reminds me of people who argued for monetary tightening in 2008 because of a commodities boom; to caricature only slightly, it's the idea that the whole US economy should be limited by port capacity at LA 12/
That said, if the Great Resignation persists and/or if there start to be hints of expected inflation feeding into price-setting, the Fed may want to raise rates, and shouldn't set down markers that it definitely won't.13/
If I have a difference with Jason Furman here, it's about nuance not big picture14/ piie.com/commentary/spe…
Basically, however, don't panic. This isn't 1973, when Nixon's political business cycle interacted with the oil shock to produce stagflation. It's a much more excusable and manageable problem 15/
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