Inflation would probably have been even higher without the rise of the delta variant.

Not open-and-shut: virus has reduced supply (inflationary), reduced demand (deflationary), and shifted demand (ambiguous).

The 2020 virus cut inflation, delta probably is doing so too.

A 🧵.
In 2020 prices actually fell in April & May when the virus first hit. The price of oil was actually negative! Inflation was low all year.

The conventional wisdom eight months ago was that the rapid reopening of the economy would cause a transitory *increase* in inflation.
Go back and read the analysis of the high inflation we had in April, May and June. The standard argument was that the vaccines were deployed more quickly and effectively than expected so that was temporarily increasing inflation. NO ONE said vaccines were reducing inflation.
Now that the delta variant has slowed the reopening of the economy the conventional wisdom has reversed and the argument is that a slower reopening of the economy means more inflation not less.

It is possible the old argument was wrong and the new one is right, let's look at it.
Let's try to imagine what the economy would have been like if COVID cases had continued to decline as we had hoped. Everything in the following is relative to this counterfactual. (So "decrease" = "decrease relative to the counterfactual" even if it actually increased.)
SUPPLY DECREASE is what gets the most attention, this is the closed factories in Asia and the slow return of workers in the United States. All else equal this means higher inflation, just like the supply decrease in 2020 was inflation.

But all is else is not equal.
DEMAND DECREASE goes the other way. Delta has lowered labor earnings and lowered business sales in ways that, by themselves, are demand reducing. In 2020 this effect massively dominated the supply effect.
DEMAND SHIFT from services to durables has an ambiguous impact on inflation, increasing goods inflation but reducing services inflation. You can't simply say "absent the shift goods inflation would be lower so overall inflation would be lower."
The delta-induced reduction in services inflation has been large. An index of pandemic prices is still 7 percent below its pre-COVID trend and has fallen since the summer as delta slowed the services reopening.
Falling airfares, hotel prices and other pandemic services subtracted from inflation in August, September and October. Relative to the non-delta scenario the subtraction would likely have added.
Note, I'm not saying the net effect of the demand shift is deflationary, would need to know more about relative elasticities for goods and services. What I am saying is analysis can't include one partial effect and ignore another partial effect that is the flip side of it.
(And BTW, the idea that reduced services spending leads dollar for dollar to new goods spending is itself likely not true. It wasn't true in 2020. It could be less true now when people have more durables. Most of the service shortfall is health spending. Etc.)
Let's now step back and talk about the big picture of what this does and does not mean.

First, we should not overstate the magnitude of the economic impact of delta. It has been negative for real GDP/employment and likely negative for inflation but I'm not sure by how much.
Restaurant spending is roughly normal (and very high nominal). Casual empiricism suggests there have been more weddings lately not less (pent up demand!) and most families doing normal travel/gatherings for Thanksgiving. Biggest shortfalls are business travel and health.
And the best estimate is that growth slowed a little in Q3 but not a lot while job growth remained reasonably robust and the unemployment rate fell sharply. (Moreover, growth likely would have slowed in Q3 regardless as initial reopening was over.)
Second, to the degree delta has been deflationary it suggests that all-else-equal when the pandemic comes more under control (or people ignore it more or manage it better, may get worse before it gets better) that would be a positive for inflation.
Specifically, goods inflation might cool somewhat but there is a lot more room for services inflation--not just in pandemic services but also in other areas like rent.

On net my best guess is the inflation rate falls but remains in the 3-4% range for 2022 as a whole.
A broader lesson: confirmation bias is strong, I try to resist it but not always successfully. In this case, unless you were arguing the rapid deployment of the vaccines was temporarily pushing inflation down in Apr, May & Jun then you should ask why you've changed your mind now.

• • •

Missing some Tweet in this thread? You can try to force a refresh

Keep Current with Jason Furman

Jason Furman Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!


Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @jasonfurman

24 Nov
I'm not writing any more economic threads until after Thanksgiving. I hope you're not reading any until after Thanksgiving either. But in case you're weird enough to want to use the break to catch up here is a thread of some recent threads. Enjoy--or even better don't!
I put my thoughts on inflation and the Fed together in a thread and many other formats. Short version: economy getting better, inflation is high and likely to be at least partly persistent, Fed should recalibrate towards less expansionary policy.
Underlying this is the argument that: (1) monetary policy is a continuum, (2) it is constantly changing and has become looser recently, and (3) there really is a risk of doing too much.
Read 13 tweets
24 Nov
Today's personal consumption data gives the most detailed picture of where consumers are now.

And the answer is: overall consumption is back, the goods-services disconnect is still large, but mostly that is because goods are high and rising even while services partly recover.
Here is real spending on goods and goods. Note that real services spending has been *rising* even while services spending is recovering.
Look at spending on sporting equipment, guns & ammunition vs. membership clubs and sports center. The former is high and the later is low. But the goods spending is still rising even while the services is roughly flat.
Read 10 tweets
24 Nov
New personal income data. Disposable personal income has mostly continued to rise as we see a handoff from income support like UI and checks to wages and compensation.

Inflation, however, has eroded DPI in recent months.

But even with inflation real DPI roughly on trend.
Nominal compensation is growing very rapidly (this is that analogue of nominal GDP being above trend, if we were targeting this we would be tightening monetary policy a lot). Even real is roughly on track.
Overall in nominal terms compensation has been cumulative about $1.5T above the pre-pandemic trend (originally mostly govt support). Consumption $0.9T below trend. So total excess saving are $2.4T. Not clear whether/when these spend out.
Read 4 tweets
24 Nov
New PCE price data (the Fed's target). Just 2 months ago the median FOMC forecast was for 3.7% core PCE inflation this yr. At the time they knew about delta/microchips/labor/etc. Implicitly they forecast 0.11%/month. Instead we got 0.25% in September and 0.43% in October.
At this point absent dramatic price reductions in November and December inflation for 2021 will be even higher than the median FOMC forecast that was made nine months into the year.

FOMC members have been shifting towards more balanced assessments, they should keep shifting.
Here are prices relative to trend. Even if you started your inflation averaging January 2015 we would still have already met averaging on a backward-looking basis. And based on expectations for the next five years the average is also being exceeded.
Read 4 tweets
24 Nov
Big news in the GDP revision out this morning, *might* really change our understanding of Q3. Growth might have been much higher than the headline 2.1% GDP because another measure GDI up 6.7%. Best guess is true growth was the average: 4.4%. (All annual rates.)
The headline GDP measure is based on adding up all final sales (eg to consumers, businesses, etc.) The data is incomplete and measures have errors. Can be revised a lot over time. First estimate for Q3 was 2.0%, now revised to 2.1%.
There is another measure, Gross Domestic Income, that measures the size of the economy by adding up incomes for worker, profits for businesses, etc. In theory is identical to GDP, in practice differs due to measurement errors.
Read 7 tweets
23 Nov
Updated the blog Willie & I posted yesterday to add quits as a measure of labor market tightness (ty @MayankSeksaria). We added it--and the answer is it is the best or nearly the best predictor of nominal wages and Core CPI.…
This matters because quits is even more off-the-charts tight right now than even unemployment/job openings. Which is tighter than unemployment which is tighter than EPOP.
Here's a thread I did on our blog yesterday, doesn't have quits but all the same ideas apply--if anything is a little stronger now.
Read 4 tweets

Did Thread Reader help you today?

Support us! We are indie developers!

This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal

Thank you for your support!

Follow Us on Twitter!