Toward a Theory of þe Natural Rate of Inflation, & BRIEFLY NOTED: For 2023-01-23 Mo

braddelong.substack.com

Some sense of how much our “reopening” and now our “attack on Ukraine” supply shocks have raised the natural rate of inflation over the past two years would have been a great help in understanding...

I would also look at the effect of steel and aluminum tariffs on price increases, and limits on downward price declines due to reduced demand since there are constraints on foreign substitution. Also look at Canadian lumber tariffs. Adding the Trump tariffs and Chinese tariffs to the input/output tables might explain why prices go up, and decline more slowly despite a decrease in demand

Webber: Yes, this is what one supposes the Fed is trying to do in deciding how much flexibility above it's average inflation target, which is a just a modification of the calculation it made to decide that 2% PCE was the optimum average.

But that is the easy part. The hard part is to figure out month by month what settings to use for the FF rate, IOR, amounts of QE to buy or sell, etc.

Slightly surprising to read the reference to I-O. I suppose Webber means a fairly highly disaggregated CSGE model.

BTW, _I_ do not like the "natural" appellation. It's a estimate of an optimum and the parameters of estimation are themselves not "natural."

I would also look at the effect of steel and aluminum tariffs on price increases, and limits on downward price declines due to reduced demand since there are constraints on foreign substitution. Also look at Canadian lumber tariffs. Adding the Trump tariffs and Chinese tariffs to the input/output tables might explain why prices go up, and decline more slowly despite a decrease in demand

edited Jan 24Webber: Yes, this is what one supposes the Fed is trying to do in deciding how much flexibility above it's average inflation target, which is a just a modification of the calculation it made to decide that 2% PCE was the optimum average.

But that is the easy part. The hard part is to figure out month by month what settings to use for the FF rate, IOR, amounts of QE to buy or sell, etc.

Slightly surprising to read the reference to I-O. I suppose Webber means a fairly highly disaggregated CSGE model.

BTW, _I_ do not like the "natural" appellation. It's a estimate of an optimum and the parameters of estimation are themselves not "natural."