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Feb 10 • 6 tweets • 2 min read
I gave an expanded version of my talk on the failure to forecast inflation this past week. Link to slides here.

economics.harvard.edu/files/econ/fil…
Other versions here and in the thread I did a while ago.
Some fun new pictures in the new version, like what a standard set of rules of thumb (multipliers, Okun's law, Phillips curve) would have predicted. Which would have been a completely batty forecast.
If you tried to use a linear Phillips curve with unchanged inflation expectations to forecast the consequences of a $1m/household helicopter drop of money you would think it would cut the unemployment rate to 0% and raise inflation to 3%. Which would not be a good forecast.
The demand experience over the last year was less extreme than that thought experiment. But only slightly.
Anyway, enjoy the slides. And let me know what you think.

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More from @jasonfurman

Jason Furman Profile picture
Feb 12
A thread on the perils of interpreting moving averages that will be of interest to almost no one. Also has implications for annual averages which is a slightly more important topic. This fleshes out one aspect of my error with the Atlanta Fed wage data.
I'll use a made up hypothetical of the following wage data. What would you say happened to wages in the pandemic period (which for expositional simplicity I'm drawing as starting in 2020)?

I think you would say wages fell in the pandemic. Image
The right calculation for what happened in wages in the pandemic would be:

Wage growth in pandemic = (wage level Dec 2021 / wage level Dec 2019).

In the picture above this is -1% if you annualize (take the square root to get growth per year).
Read 15 tweets
Jason Furman Profile picture
Feb 11
My charts on the distribution of real wage growth were flat out wrong, as @IrvingSwisher correctly pointed out. I'm deleting all of the tweets (here's a screenshot of one so you know what I'm talking about). Feel terrible to have put this out.

This 🧵 explains more fully. Image
The question I was trying to ask was what has happened to wage growth adjusted for inflation by different income groups & how does it compare to pre-COVID.

The broad inference is likely still true but possibly less bad than I showed (it is unclear). The data was wrong.
I still believe the following are true for the period from the pandemic to today:

1. On average nominal wages have increased more slowly than inflation.

2. Faster wage gains for lower-wage workers

3. For most groups any inflation-adjusted gains are smaller than pre-pandemic.
Read 18 tweets
Jason Furman Profile picture
Feb 10
Even if all firms are perfectly competitive an increase in demand will result in an increase in profits in the "short run"--the short run being a potentially long period until new entrants can compete the profits away.

A 🧵 with an refresher/explainer on the Ec10 of this. Image
The left-hand curves are the normal supply & demand, they show the market as a whole. The supply curve is the sum of the products supplied by many, many firms. Demand increases for some reason (a taste shift, strong economy, stimulus checks, whatever). The result is P and Q up.
The right-hand curves are from the perspective of a single firm. It is just a small firm in a big competitive market with no pricing power so it "sees" a horizontal demand curve. It can sell it wants at that price but nothing if it raises the price a penny above it.
Read 13 tweets
Jason Furman Profile picture
Feb 10
If you think corporate greed is playing a major role in the current inflation then you need to rethink a lot of your views.

1. FISCAL MULTIPLIERS. Fiscal stimulus is less effective than you thought because it will go more into prices/profits than quantities.
2. INCIDENCE ANALYSIS OF FISCAL TRANSFERS. Distributional tables that show the stimulus checks going to households, for example, not correctly reflect that much of the benefit of the stimulus checks was captured by higher prices instead of higher purchasing power.
3. WORKER POWER AND REAL WAGES. If stronger demand raised the ability of corporations to do unfair or unjustified price increases over and above their costs then the flip side is you are saying that heating the economy lowers real wages.
Read 5 tweets
Jason Furman Profile picture
Feb 10
A way to think about inflation: it has a permanent component and a transitory component.

Use CPI signal extraction (e.g., look at subsets of the CPI) to understand the dynamics of transitory.

But use structural macro thinking to predict trajectory of permanent.

Very short 🧵
The best way to understand the TRANSITORY part is to get deep inside the CPI data & also listen to Odd Lots with @tracyalloway and @TheStalwart.

Thinking about statistical mean reversion, understanding which parts of the CPI are signal and which are noise, etc., works OK here.
To understand the PERMANENT part you should look a little at the CPI data. But mostly think about forward-looking macro models not CPI signal extraction. Eg, labor markets tighter than they were a year ago, inflation expectations higher, monetary policy still ultra accommodative.
Read 5 tweets
Jason Furman Profile picture
Feb 10
Policy implication of today's inflation data:

1. The Fed needs to hike in March. If two strong jobs reports & another high inflation print should be 50bp. But 25 bp is OK too as long as they're on an every meeting pace.

2. Congress needs to raise the Child Tax Credit.
The truth is the President can do very little to lower inflation. He can & should do everything he can on supply (and he is doing most of it already) but won't add up to much.

Congress *could* lower inflation with contractionary fiscal policy but I would leave it to the Fed.
What Congress and the President could do is pass something like Build Back Better that provides more relief from these rising prices.

And it would not further add to the price increases if it is paid for.

Throw in a little deficit reduction as insurance if you want.
Read 4 tweets

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