This reminds me again of what a catastrophe the Volcker disinflation was for my personal “homeland,” the industrial cities and towns on the southern shore of Lake Erie. Maybe the deindustrialization, etc. would have happened anyway, since big companies were already shipping everything moveable to the non-union low-wage South anyway, but it might at least have been slower.
I spent my forty-year working life here anyway, but it is strange to look back and recognize that the rules of the game had changed, just as I was starting out, and not to our advantage either, because the wisemen of the Fed had decided that there was no alternative (to coin a phrase).
I agree in two senses. a) The recession was prima facie evidence that the Fed was bringing inflation down too quickly. b) The high interest rates overvalued the dollar and shifted relative prices against tradable goods, but only manufacturing was mobile and could move to places with lower input prices, first the South, later China.
1) War! What is it good for? Inflation. (lesser hit: Pandemic! What is it good...
2) Once inflation starts falling, it falls as fast as it rose.
3) High inflation most often bottomed at 0% inflation. The 2 exceptions were the 1920's (depression & deflation) and the 1970's (2 consecutive energy shocks).
4) Current CPI less shelter is 0.0%, and we know that shelter CPI is lagged and heading to 0%, so we are heading to the modal case of 0% headline inflation, short of another war or pandemic.
I'm afraid, I had not paid enough attention to this argument about proportionality and the appropriate historical reference before:
"Olivier Blanchard writes: In early ... it reasonable to think that a 200-basis-point increase in the policy rate, so only 1/6 of the rate increase from 1975 to 1981, will do the job this time when the gap between core inflation and the policy rate is 2/3 of what it was in 1975? And that unemployment will barely budge? I wish I could believe it…" ......
The suggestion seems to be that we have today 2/3 of the problem we had in 1975, and so the solution would be to do 2/3 as much—to raise interest rates by 800 basis points, 8% points—but then to apply some haircut to that 800 basis-point interest-rate rise because “today is obviously different in many ways”. But why does he pick 1975-1983, rather than 1951 or 1948 or 1920? Does economic theory tell him to do so?"
Anyone with even the slightest appreciation for economic history or an inclination toward it would ask that question before making an assessment. Meanwhile, on "that the unemployment rate will barely budge" here are the unemployment, CPI combos: June 2022 (3.6%, 8.9%). June 2023 (3.6%, 3.3%).
On top of that, in the twelve months through June 2023, the labor force grew at a 1.8% annual rate (thanks mainly to growing participation). That was more than triple its 0.5% expected natural growth. Anyone who didn't keep an eye on this probably had it partially wrong, at best.
"First published 2022-03-19 Sa; I-am-pretty-smart edition..."
And I am the smarter-for-having-seen-it-on-Grasping edition because I have had that very essay pinned to the wall in front of me since. And here's the pudding that provides the proof in the 3-month annualized rates of change of the main inflation measures:
Headline: 1.9% (not a typo!)
Core: 3.1%
Services less energy: 4.1%
Commodities less food and energy: 0.7% (that's rounded up, also not a typo!)
Services less energy, rent and owner's equivalent rent: 1.7% (yep, not a typo again)
With those CPI numbers, I am waiting with bated breath -- if I can bate it long enough -- for the PCE report.
This reminds me again of what a catastrophe the Volcker disinflation was for my personal “homeland,” the industrial cities and towns on the southern shore of Lake Erie. Maybe the deindustrialization, etc. would have happened anyway, since big companies were already shipping everything moveable to the non-union low-wage South anyway, but it might at least have been slower.
I spent my forty-year working life here anyway, but it is strange to look back and recognize that the rules of the game had changed, just as I was starting out, and not to our advantage either, because the wisemen of the Fed had decided that there was no alternative (to coin a phrase).
I agree in two senses. a) The recession was prima facie evidence that the Fed was bringing inflation down too quickly. b) The high interest rates overvalued the dollar and shifted relative prices against tradable goods, but only manufacturing was mobile and could move to places with lower input prices, first the South, later China.
I am smart - the autobiography.
US historical inflation:
1) War! What is it good for? Inflation. (lesser hit: Pandemic! What is it good...
2) Once inflation starts falling, it falls as fast as it rose.
3) High inflation most often bottomed at 0% inflation. The 2 exceptions were the 1920's (depression & deflation) and the 1970's (2 consecutive energy shocks).
4) Current CPI less shelter is 0.0%, and we know that shelter CPI is lagged and heading to 0%, so we are heading to the modal case of 0% headline inflation, short of another war or pandemic.
I'm afraid, I had not paid enough attention to this argument about proportionality and the appropriate historical reference before:
"Olivier Blanchard writes: In early ... it reasonable to think that a 200-basis-point increase in the policy rate, so only 1/6 of the rate increase from 1975 to 1981, will do the job this time when the gap between core inflation and the policy rate is 2/3 of what it was in 1975? And that unemployment will barely budge? I wish I could believe it…" ......
The suggestion seems to be that we have today 2/3 of the problem we had in 1975, and so the solution would be to do 2/3 as much—to raise interest rates by 800 basis points, 8% points—but then to apply some haircut to that 800 basis-point interest-rate rise because “today is obviously different in many ways”. But why does he pick 1975-1983, rather than 1951 or 1948 or 1920? Does economic theory tell him to do so?"
Anyone with even the slightest appreciation for economic history or an inclination toward it would ask that question before making an assessment. Meanwhile, on "that the unemployment rate will barely budge" here are the unemployment, CPI combos: June 2022 (3.6%, 8.9%). June 2023 (3.6%, 3.3%).
On top of that, in the twelve months through June 2023, the labor force grew at a 1.8% annual rate (thanks mainly to growing participation). That was more than triple its 0.5% expected natural growth. Anyone who didn't keep an eye on this probably had it partially wrong, at best.
"First published 2022-03-19 Sa; I-am-pretty-smart edition..."
And I am the smarter-for-having-seen-it-on-Grasping edition because I have had that very essay pinned to the wall in front of me since. And here's the pudding that provides the proof in the 3-month annualized rates of change of the main inflation measures:
Headline: 1.9% (not a typo!)
Core: 3.1%
Services less energy: 4.1%
Commodities less food and energy: 0.7% (that's rounded up, also not a typo!)
Services less energy, rent and owner's equivalent rent: 1.7% (yep, not a typo again)
With those CPI numbers, I am waiting with bated breath -- if I can bate it long enough -- for the PCE report.