There's a lot of fairly ill-tempered debate among economists about news that should make everyone happy — disinflation without recession. My thought: we should apply Occam's extended razor. When in doubt, go for the simpler story, and rely on standard models 1/
Most econ textbooks offer some version of an aggregate demand-aggregate supply framework that looks like this 2/
For much of 2022 and some way into 2023 many economists were arguing that reducing inflation would require a big reduction in aggregate demand (via Fed hikes) that would lead to large job losses 3/
But what we actually got was a lot of disinflation, even in measures that tried to extract "underlying" inflation excluding volatile components ... 4/
... with the employment situation improving rather than worsening 5/
The simplest explanation consistent with the standard model — Occam's extended razor — was and is a rightward shift in aggregate supply 6/
Where might such a shift come from? The obvious answer is the end of Long Transitory, ie recombobulation — the economy sorting out lingering pandemic-related disruptions 7/
We don't know for sure that this is true; when do we ever know that anything in economics is true? But alternative explanations, especially claims that the Fed somehow did this with its mystical power of credibility, feel like attempts to explain away a big forecasting miss 8/
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Thinking about the puzzling action in bond markets last week. Here are constant maturity yields from Treasury; they're based on market rates ~3:30 PM. The Fitch downgrade came after that on Aug. 1, although news may have leaked out before 1/
What's notable is that the spike took place mainly at the very long end; it has already been fully reversed for 10-years, although not for 30-years. This is really very odd 2/
Suppose you believe, as Fitch suggested, that US political dysfunction is the problem — and God knows we have that, although why you should be more worried now than a year ago, or why you need Fitch to tell you, is unclear 3/
A lot of people saying that disinflation was caused by Fed rate hikes.And even though I supported those hikes — I don't think there was any alternative — I'm puzzled by these claims. How is this supposed to have worked? 1/
The textbook story is that it works like this:
Higher rates => economic slack => disinflation
But where's the rise in economic slack? 2/
Do people have a theory of immaculate transmission of monetary policy to prices, without any real-economy weakness along the way? If so, what is that theory? 3/
It's nice to see economists squabbling over who gets credit for declining inflation, as opposed to who gets blame for rising inflation. As I see it, there are two and a half possible stories 1/
The half story is that this is another head fake — maybe something about the seasonal adjustment factors or something, and the numbers will be revised to make things look less rosy. Probably not given all the private surveys, but history makes me nervous 2/
Assuming the news is real, one possibility is that a lot of inflation was in fact the temporary result of pandemic-related disruption, which is now fading away 3/
There's a lot to this — in particular, inflation came as a big shock after all those years of quiescence. But a lot of the discourse here seems to ignore a couple of points 1/
First, how upset are people about the economy, really? The venerable Michigan survey says they view it as awful. But the Conference Board survey, which has been running for a long time, puts consumer confidence around where it was in 2018 2/
Second, the Michigan survey asks consumers what they've heard about specific issues — and they consistently report hearing more bad than good news about employment, amid a huge jobs boom 3/
I assume others have pointed this out, but the misery index — unemployment plus inflation — is all the way back to where it was when Biden took office 1/
In an ironic twist, efforts to minimize progress now involve asserting that the decline in inflation is transitory. But you really have to engage in statistical contortions to make this claim 2/
Measures that exclude volatile prices and shelter, which we know is a lagging indicator, show a clear decline in underlying inflation 3/
Some Bidenomics posting from another time zone. The CEA has an interesting post on comparative international inflation rates, but is too polite to be entirely clear about why it matters 1/ whitehouse.gov/cea/written-ma…
Here's the key figure, which adjusts for the differential effects of the Putin shock 2/
Context: a while back, some economists were using higher US inflation to argue that Bidenomics, especially the American Rescue Plan, was the major culprit in inflation 3/ piie.com/research/piie-…