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/…
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/…
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/…
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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More from @paulkrugman

18 Nov
Need to guard against wishful thinking, but there do seem to be straws in the wind suggesting that supply-chain issues are getting less serious. Here's the Baltic Dry Index of shipping costs 1/
Big retailers seem to be doing fine on inventory for the holidays 2/…
Given the way these things typically work, I wouldn't be surprised if we hit peak inflation panic just as actual inflation is fading away 3/
Read 4 tweets
14 Nov
Trying to clarify my own thoughts on inflation. I got inflation wrong; I didn't see the current surge coming. But why? I didn't think the fiscal stimulus early this year would boost demand as much as Summers et al predicted ... and, in fact, so far it hasn't 1/
Real final demand (excluding inventories) is up 2.6% over the past two years. That's well short of normal growth in potential output 2/
What's happened, however, is that we've faced supply constraints, both supply-chain issues in meeting huge demand for durable goods and withdrawal of workers from the labor force, i.e. Great Resignation 3/
Read 5 tweets
6 Nov
Question: Why was "infrastructure week" a joke under Trump, who could have gotten the votes at any time, only to become reality now despite razor-thin Dem majority? It wasn't just incompetence, although that too 1/
I think two factors. 1st, the McConnell wing of the GOP doesn't want a successful spending program, even under an R president, because that might help legitimize an increased govt role in general. That is, they opposed infra not bc it might fail but bc it might succeed 2/
2nd, Trump team was addicted to crony capitalism. They couldn't do a clean bill; it had to offer privatized stuff that would mean big bucks for their friends 3/…
Read 4 tweets
5 Nov
A week of terrible political news for Democrats has also been a week of good news on the economy and Covid. But will the objectively good news move public sentiment? A few thoughts 1/
The employment report was almost all good news, confirming surveys suggesting that the third-quarter air pocket was behind us. Labor force participation still low, but overall recovery very much on track 2/
Aside from Delta receding, good news on the effectiveness of vaccine mandates. NYC at 91 percent compliance, not facing the crunch widely predicted 2/…
Read 8 tweets
28 Oct
What's actually happening on Democratic plans? I have no idea. We still seem to have a standoff between corporate Dems who won't say unambiguously that they'll vote for Build Back Better and progressives who won't vote for infrastructure without that assurance 1/
Assuming Dems get past this, one remaining question is whether the pay-fors will actually work — whether tax hikes and improved enforcement will actually cover the cost of new spending. But the key point here is that *it doesn't matter* 2/
The main reason Dems want a deficit-neutral bill — whereas Rs have no qualms about unfunded tax cuts — is that Joe Manchin seems to think deficits are important. But they aren't, in a world of negative real interest rates 3/
Read 4 tweets
27 Oct
As Joe says: we aren't having stagflation, we're having a (temporarily?) inflationary boom 1/
We talk a lot about supply-chain disruptions, but mostly what we have is supply chains delivering more than ever, but unable to keep up with demand 2/
That's what's happening at the Port of LA 3/…
Read 4 tweets

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