Inflation might be easing for now, but we are living in an age of overlapping emergencies. More shocks are likely to come. We need economic policy preparedness for micro stabilization. But which prices matter?
Inflation used to be thought of as being ‘always and everywhere a macroeconomic phenomenon’ that macro tightening should address. However, the current inflation is the result of sectoral shocks that involve large changes in relative prices & require a micro policy response. 2/
But which of the price shocks are most important for general price stability? We propose a method to identify systemically significant prices for inflation using input output simulations. 3/
We build a Leontief price model for the US with 71 sectors to simulate price shocks. Price shocks are based on a) sectoral price volatility in 2000-2019, b) price changes in the post-shutdown inflation (Q4 2021), & c) price changes in the Ukraine war inflation (Q2 2022). 4/
Our simulations show that price shocks in about 10 sectors generate a much larger total inflation impact than all other sectors. We call these systemically significant prices. 5/
8 sectors were systemically significant before COVID & now (underlined). There are 3 groups: basic necessities, basic production inputs & basics of circulation. So, the sectors that present points of vulnerability for price stability could have been identified in advance. 6/
In our baseline model (i), we assume full cost passthrough. What if businesses can compensate for a decline in the profit margin that follows from higher costs (ii), or workers for losses in real wages (model iii)? We find: The same sectors remain systemically significant! 7/
We can also see from model (ii) & (iii) that price shocks in systemically significant sectors tend to hit workers harder than businesses (model iii leads to greater price adjustments to compensate for losses in real wages). An important exception: Oil and gas extraction. 8/
By far the most systemically significant sector in all our simulations is 'Petroleum and coal products'. This underscores the challenges for monetary stability in a green transition #greenflation 9/
Monitoring capacity for prices in systemically significant sectors is necessary for economic policy preparedness. Governments should be able to implement a policy response BEFORE price shocks risk broader inflation. 10/
This paper is agnostic about the specific micro policies to respond to shocks in systemically significant prices since we believe they need to be tailored to the specificities of each sector. 11/
We hope to provide a framework that can bring together the range of micro policy responses currently discussed from anti trust to windfall profit taxes, buffer stocks, regulation against financial speculation, emergency price stabilization and increased investments. 12/
Can price controls be optimal? Our model says: Yes, if there is endogenous price uncertainty. Economists need a more rational relation with price caps. Delaying them when shocks hit essentials deepens the crisis & fuels the far right as the German case shows. 🧶
Germany's dependence on Russian gas meant it was hit hard by the Russian invasion of Ukraine. But market fundamentalist economists downplayed the impact of the energy shock & opposed policies to control energy prices. This delayed the government’s intervention. A mistake: 2/
If we use real wages as a yardstick, the energy crisis of 2022 has been the worst economic crisis in Germany since WWII. 3/
.@adam_tooze with all the right questions on the obsession with the 2% inflation target: "In an age of populism and mounting calls for racial justice, can marginal reductions in inflation take priority over youth and minority unemployment?" 1/
"If we favour trade unions as defenders of democracy and a powerful countervailing force against inequality, should we not be backing them rather than denouncing wage-price spirals?" 2/
"If we are serious about rebuilding the fabric of our common life with public investment, how far can we subordinate fiscal policy to the demands of financial stability?" 3/
It's been a lively week on Twitter and I thought I should say more about WWII-style price controls across the entire economy. Doing that for our time strikes me as mad and I haven't seen anyone advocate it. We are living in an age of overlapping emergencies, not total war. 1/
My '21 Guardian op-ed considered what the stance of leading economists on price spikes in the transition to a post-war economy could tell us about the post-shutdown inflation. The historical parallel had already been drawn by the White House Council of Economic Advisors. 2/
At the end of the war, monetary conservatives like Irving Fisher, the textbook authors Samuelson and Milton Friedman's mentor Frank Knight were all in favor of STRATEGIC, CAREFULLY SELECTED, SECTORAL price controls for CRITICAL sectors while transitional bottlenecks lasted. 3/
Corporate concentration is a possible explanation of price and profit hikes driving inflation. But concentration was high before inflation. So, why can firms hike prices in an emergency? We explore this question in a new working paper. A 🧵scholarworks.umass.edu/econ_workingpa…
US profit margins have reached levels not seen since the aftermath of WWII when inflation coincided with windfall profits. As @mtkonczal shows, there is again a relation between profits & inflation. But why have the same firms that kept prices stable started price hikes? 2/
We conceptualize this inflation as a Lerner-type sellers' inflation driven by the pricing decisions of firms. Lerner (1958) observed: ‘There is… no essential asymmetry between the wage element and the profit element in the price asked for the product', both can drive prices. 3/