NPR/WHYY – Radio Times with Marty Moss-Coane: Biden’s economic plan and the state of the economy
September 21, 2021
Mark Zandi, Chief Economist at Moody’s Analytics and former GIC speaker, was recently featured on NPR Radio Times for a discussion on the state of the economy.
In response to Mr. Zandi’s comments, Peter Gold, Chair of the GIC College of Central Bankers asked, “What is the definition of “transitory” referring to inflation? When does transitory become longer?”
“I would worry that above target inflation is not transitory if inflation expectations in long-term bond yields are persistently above target inflation, and that unit labor cost growth is consistently accelerating. Neither is the case today.” – Mark Zandi, Chief Economist, Moody’s Analytics
We thank Mark for his permission to share his response and invite you to reply below with your views on this topic. The link to this episode of Radio Times is below for your reference.
September 15, 2021 – Biden’s economic plan and the state of the economy
NPR/WHYY – Radio Times with Marty Moss-Coane
Seems to me that Zandi is right. The high inflation observed around the world appears to be transitory and pushed upwrds by base effects. Over the last couple of months there has been some slowing, but also lots of variation. IN the UK last month CPI fell 0.5% and this month it rose 1.2%.
The issue seems to be what is there in the data to suggest that inflation at the forecast horizon – say 2 years ahead is going to be markedly above 2%? Many of the price rises are driven by bottlenecks and once off changes but as we saw with the price of timber which rose sharply consumers can alter their spending habits in the face of price rises. In the UK this month the price of second hand cars was up 19%, so people put off buying cars and the price falls. INflation is about the price of a representatuve basket of goods and as prices change consumptin patterns change. Lower priced goods are substituted for higher priced goods so inflation falls.
There is potentially some evidence that wages for particular types of work has changed and will have to rise but these may well be once off changes
So my view is nothing to see here, which has been the case for at least a decade.
Danny Blanchflower
The ongoing conversation about whether the current episode of inflation is transitory or not begs the most important question that must be addressed. We certainly have inflation now and it has persisted for over a year. The stress on transitory deflects attention away from the important question of the role of monetary and fiscal policy. Simply stated, the current stance and future path of monetary policy and fiscal policy will be the most important factors in determining how persistent inflation will prove to be. By almost any metric you wish to use, both monetary and fiscal policy are the most aggressive or accommodative we have seen in nearly 80 years. Will policymakers alter the policy paths or not? I don’t know. I do think that if policymakers continue to stress that “it is all transitory,” to defect attention away from tough policy choices, inflation will prove to be longer lasting and more damaging. Delay may precipitate or necessitate a more dramatic reversal at some point with potentially significant disruptions to restore credibility.
People don’t like those of us that draw analogies to the sixties and seventies, but the similarities are striking. Under pressure from President Johnson, the Fed (under William McChesney Martin) kept interest rates low during the mid- to late-sixties to aid funding of the President’ Great Society programs and the Vietnam war effort. This was soon followed by President Nixon’s pressure on the Fed (under Arthur Burns) to continue to keep rates low in response to the oil shocks and embargo to support employment in response to the supply dislocations the shocks caused. (I will let you substitute Presidents names and the spending programs, employment concerns, and supply dislocations of today.) Of course, we got wage and price controls that failed, but not monetary policy restraint. The lack of policy restraint transformed the supply shocks caused by oil supply disruptions into more persistent inflation than might otherwise have been the case. Failure of monetary policy to respond allowed inflation expectations to rise exacerbating the problem.
We would like to think this could not happen again, that we have learned the lesson. But have we? If you listen to the language today of the Fed and policy makers, while dressed-up in modern technical lingo, the messages are strikingly similar to that of fifty years ago. (If you are interested, see Arthur Burns 1979 Per Jacobsson Lecture. “The Anguish of Central Banking” where he describes the political and economic slippery slopes of that period. It is partly a mea culpa but also an excuse and justification for his actions.)
As far a expectations are concerned, yes they are important, but they are not directly observed by the Fed and all the surveys and market based measures have their flaws. Yet expectations based on survey measures have notably risen (even if nominal long-term bonds yields have not followed.) The Fed has placed a lot of weight on the role of expectations in determining the path of inflation, almost to the exclusion of the conduct of policy. This is not a useful way to think about inflation or monetary policy. Words by the Fed that inflation is anchored are not credible without the willingness to take actions using influential tools to back them up. Moreover, once it is clearly obvious that expectations have become unanchored on risen notably, it will too late. The Fed will then have to act to restore credibility and, as I mentioned, that could prove painful.
You are welcome to see my recent paper if you are interested in further thoughts.
https://www.hoover.org/sites/default/files/research/docs/21116-plosser_1.pdf