There is a lot of misinformation going around about the current inflation situation. A morning thread to offer some clarity...
1/ First, price inflation is obviously going on. It's a real issue impacting real people. But if we mis-diagnose the cause, we'll apply the wrong solution.
2/ Basic econ: higher prices come when demand exceeds supply. But that can come about either because demand is unusually high OR because supply is unusually low.
3/ The inflation hawks out there right now are asserting that we have too much demand. We put a lot of $ into the economy (which we did!), which led to lots of people buying things, increasing demand on the system. If true, we should be cautious about more fiscal injection.
4/ Also: since the Fed has bought so many treasuries over the last decade, they are sitting on mountains of ammunition to tamper that kind of inflation. They could taper or sell off those treasuries, which would raise interest rates and slow down our rate of growth
5/ HOWEVER... if inflation is instead being driven by too little supply that would be exactly the wrong approach, because it would reduce the private sector's access to capital and slow down their ability to invest in those things that bring supply back up.
6/ Also, if we are in a supply-constrained situation, fiscal stimulus might be exactly the right medicine to ease inflation by making targeted federal investments in things that debottleneck our economy.
7/ So, like I said. Make sure you correctly diagnose the cause before you pick a solution. Fortunately, this is a testable hypothesis.
8/ Rising gasoline prices turn out to be almost entirely supply-driven. Gasoline demand hasn't really moved but the Texas freeze and increasing exports have constrained US supply.
https://twitter.com/SeanCasten/status/1460592487035191300?s=20
9/ Natural gas markets are very similar. No increase in US demand this year but...
https://twitter.com/SeanCasten/status/1450932063264251910?s=20
10/ ...US production is down thanks to collapsing rig counts last year (and also, a huge surge in LNG exports). So again, this is a supply-, not demand-driven inflationary pressure
https://twitter.com/SeanCasten/status/1450934237063000066?s=20
11/ How about semiconductors that are creating so much pressure in the electronics and aviation industry. Again, supply driven. First from the Texas outages last winter: fortune.com/2021/02/17/tex…
12/ And then across the world (but also climate change driven) drought-caused outages in Taiwan. These two factors combined shut down big chunks of the semiconductor industry. scmp.com/news/china/art…
13/ How about labor markets? We have seen falling employment rates (thank goodness!) since Biden took office, but workforce participation rates remain stubbornly low.
https://twitter.com/SeanCasten/status/1441382000833667080?s=20
14/ And that fall is driven overwhelmingly by women, and the collapse in childcare during COVID. So again, a supply-driven shock.
15/ Now a few more anecdotal points worth making. Your turkey really was more expensive this thanksgiving. Was that because you decided to eat two turkeys for dinner or because supply was tight at the grocery store. I think you know the answer.
16/ Christmas trees are also in short supply thanks to droughts and western wildfires. Yes, there is a climate change theme here. But I'm guessing you aren't so flush with cash that you're decorating two homes for the holidays this year. cnbc.com/2021/11/16/chr…
17/ Anecdotally, I'm hearing from lots of businesses that in the wake of COVID supply disruptions they are increasing their inventory levels. Years of just-in-time management are being tweaked back to provide more flexibility against future volatility.
18/ If you're a supplier to those businesses that looks like an increase in demand, but if you're a customer that looks like a shortage of supply.
19/ This isn't mean to be a complete list. But the more you look for these things, the more you find supply- rather than demand-driven pressure on prices right now.
20/ The good news is that supply disruptions tend to be self-correcting. Higher prices draw producers to increase production as long as they have access to capital. That is why this is most likely a transitory phenomenon. BUT...
21/ It's only transitory if businesses have access to the capital to make those investments. This is the time to be aggressive on getting those investments in to grow our economy, not to starve the economy for resources. So let's get Build Back Better passed.
22/ And let's maintain an accommodative monetary policy environment... for now, knowing that if demand starts surging the Fed has plenty of fiscal tools to dial back.
23/ And until then... please pay no mind to those politicians who scream "EXPENSIVE TURKEYS" into every open microphone they can find. They are either economically illiterate, or intentionally trying to tank the economy to help their own political fortunes. /fin
*unemployment. Still waiting for the Twitter edit feature. Grr
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