The Fed knows who to blame for the highest US inflation in a generation. Spoiler alert: They don’t think it’s their fault.
In a new economic letter, the San Francisco Fed set about answering the most pressing economic question of our time. “Why Is US inflation higher than in other countries?”, Òscar Jordà, Celeste Liu, Fernanda Nechio and Fabián Rivera-Reyes wondered, in the title of a summary released Monday.
If it’s a simple answer you’re looking for, you might point to one (or both) of the visuals below. On the left is the ratio of the money stock to nominal output. On the right is the real shadow rate — the policy rate adjusted for both inflation and QE.
Call me crazy, but it’s at least possible that charts like those have some explanatory power when it comes to inflation.
The problem with that explanation, if you’re the Fed anyway, is that it implicates monetary policy. When you’re staring at a problem you may have helped create, it’s better to find a scapegoat. Thankfully for the technocrats, Americans love a scapegoat, despise politicians and know almost nothing about monetary policy. That’s an ideal setup for blaming fiscal largesse.
“Estimates suggest that fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed” to US inflation outpacing other developed economies, Jordà, Liu, Nechio and Rivera-Reyes said.
They used real disposable personal income to “get a read on [the] tangle of support programs” administered in the wake of the pandemic and constructed an inflation path scenario using “Phillips curve logic” — because as everyone knows, the Phillips curve is reliable, robust and beyond reproach (I’m kidding, of course).
The figure on the left (below) shows the disparity between per capita inflation-adjusted disposable personal income for the US and OECD economies. The figure on the right is the FRBSF’s inflation scenario analysis versus actual core CPI.
“The comparison between the actual path of inflation and our scenario in Figure 3 suggests that US income transfers may have contributed to an increase in inflation of about 3 percentage points by the fourth quarter of 2021,” Fed researchers concluded.
To be sure, they attempted to soften the blow by conceding “considerable” uncertainty around their projections, and by noting that “without spending measures, the economy might have tipped into outright deflation.” But it’s difficult to read the analysis without emitting a wry chuckle, especially when you note that, according to the midpoint of the estimate (solid green line in the figure on the right, above), core CPI would’ve been very close to the Fed’s target absent fiscal stimulus. That’s pretty convenient.
Ultimately, inflation is first and foremost a product of the pandemic and, now, the conflict in Ukraine. But you’d be obtuse to suggest fiscal and monetary policy didn’t contribute. The figure (below) underscores the point.
As regular readers know, I’m squarely in the camp who believes deficits don’t matter for a reserve currency issuer, let alone for the reserve currency issuer. The problem isn’t the deficit itself, it’s how that “red ink” manifested in a supply-constrained economy that matters for this discussion.
Ultimately, I always return to the same assessment. Something like a free lunch probably is possible in advanced economies with sufficient monetary sovereignty. Just not right now. I’ll recycle some language from a late January article.
The apparent demise of the Phillips curve and other frameworks for assessing the relationship between key economic variables, tempted us to rethink what’s possible. The pandemic forced the issue.
But, in a cruelly ironic twist, the exogenous shock that finally tipped the scales in favor of a policy conjuncture aimed at fostering an almost literal interpretation of the term “full employment” simultaneously introduced severe supply-side disruptions. Those disruptions translated to a powerful inflationary impulse which, at least temporarily, supplanted and overwhelmed myriad well-documented deflationary forces that most of us assumed would everywhere and always predominate.
It’s far from clear that a free lunch isn’t possible. I still believe it is. We were just dealt the wrong crisis. One could conjure any number of exogenous shocks that would’ve compelled the same policy rethink (i.e., the institution of fiscal-monetary partnerships) without the accompanying inflation. The nature of this shock was incompatible with many key disinflationary forces (e.g., globalized supply chains), even as it magnified others (e.g., too much debt).
Whatever the case, the free lunch idea is out. Or at least for now. The Fed, The White House and Congress all saw the whites of inflation’s eyes. The irony of inevitable finger-pointing isn’t even that both technocrats and lawmakers are equally responsible. Rather, the irony remains that inflation was the product of a pandemic that collided with a hyper-globalized economy. We weren’t prepared for the pandemic and, as I put it last month, we may have “built the world wrong” from an economic perspective. What we should be asking, if we want to point fingers, is whose fault that was.
Read more: We Built The World Wrong
economy reopened from a standing start 2. consumption bucket abruptly changed which misallocated production 3. fiscal and monetary policy was highly stimulative 4. oil and gas financing was constrained from esg demands 5. ukraine damaged agricultural production and oil and gas exports 6 pandemic continued to damage production through additional waves
The Fed is saying it’s the poors’ fault. My take on their study is that for inflation to remain tamed, someone’s children must have food insecurity.
They could have studied how the shuttering of schools and childcare centers contributed to the low labor participation, or how free pre-K could alleviate inflation. But no, they only looked at what they already knew was correlated to inflation.
It’s not ironic that rich Fed bankers always find ways to blame the people they can never understand or empathize with for the problems they help create. There is a simple solution to giving people a free lunch, stop driving monetary policy through rich people to trickle down to the poor so that you can blame them for getting the smallest of benefit from the policy you created that grew the rich’s wealth more than at any other time in history.
Here is another great moment in Ironic History:
“Scapegoat [coined by William Tyndale (English translator of the Bible) to designate the goat on which the high priest of the ancient Jews confessed the sins of the people on the Day of Atonement, after which it was allowed to escape into the wilderness bearing those sins (Lev. 16:7-26)]”
Tyndale was condemned to death for the translation.
I think he was scapegoated at the stake. Oxidized to death. Ironic chemistry?
Another account has the coiner of scapegoat being strangled before (or during? like a twofer, a real crowd pleaser back in the day) the immolation, but, I guess that would be scapegarroting, something else entirely.
I have been subjected to bullshit from economists since the 11th grade. I like that Krugman calls it political economy. I don’t think it is a hard science. It’s more like a religion….
I love that the error band is so wide it runs from -2% up to higher than current inflation.
I’ve haven’t visited heisenbergreport in a week. So I probably missed when @H or someone pointed this out already, but, on the offhand chance it was missed in the slow-news week just past I’ll drop this quote from bloomberg.com that keeps raining on my brain-parade when I watch the New York markets sleepwalking up the wall-of-worry,
“More than a million containers set to ride 6,000-plus miles of railway linking Western Europe to Eastern China via Russia are now having to find new routes by sea, adding to costs and threatening to worsen the global supply chain chaos.
With Moscow’s war raging in Ukraine, exporters and logistics firms transporting auto parts, cars, laptops and smartphones are now looking to avoid land routes passing through Russia or the combat zone. Security risks and payment hurdles stemming from sanctions are mounting, as is wariness that customers in Europe could boycott products that used Russian rail.”
One million additional shipping containers to be sent by sea to Chinese cities in lockdown mode? A few weeks ago I’d read how the lower Mississippi River being in flood stage (happens in the spring sometimes 😉 ) was complicating shipments of soybeans to China, but, what really set the costs of barge shipments to quadruple in a matter of weeks was the simultaneous demand spike for American coal shipments to overseas. Apparently this combination has not happened in a long while. Anyway, that got me wondering about immense forces outside our control, such as typhoons, and vast armadas of supertankers over-stacked with containers log-jamming in the south Pacific or China Sea. How many supertankers lost or badly damaged would it take to really gum up the global supply chain? … “When it rains it pours.”