Should you worry about the rate of price inflation being too high?

Of course you should worry, not withstanding all of the dogmatism on Twitter and the pre-Lucasian framing of various charts and graphs.

Here is a simple way to look at it.  Let’s say the Fed does the very best job possible with its monetary policy (and in my view the Fed has done a very good job so far).  That would mean in terms of the loss function a Fed error in one direction would mean a too low rate of price inflation, and a Fed error in the other direction would mean a too high rate of price inflation.

Now, supply conditions have never been so volatile in my lifetime, and perhaps never in American history.  We don’t know how the virus will spread, how reopenings will go, when a vaccine will arrive, how good the vaccine will be, how much a climate of fear will persist, and so on.  Demand conditions in turn depend on how these supply conditions will evolve.

The Fed thus could make an error on either side of its target, through no procedural fault of its own. As a result, as a simple matter of logic, the rate of price inflation could be too high, or it also could be too low.

if you think you know the direction of the error in advance, you aren’t paying enough attention to the underlying unpredictable uncertainties.

And if your response is to cite old open letters to the WSJ and the like, that is the same dogmatic error that the inflation hawks from the 1970s have been making.

There are other, more substantive arguments why the rate of price inflation might end up too high (the fiscal side really matters!), but that is the simplest one and you won’t see it on Twitter.  And it is fine to argue, by the way, as does Matt Yglesias, that you would rather see it too high than too low.

I was glad to see Martin Wolf tackle this whole question (FT) and not be too scared off by the yappers.


The Civil War was a mere piffle when it came to volatile supply conditions.

I think the nation is still trying to price missing inventory from the war.

The precarious supplies of gunpowder, salt, flour, etc., in the Revolution and in the Civil War immediately sprang to mind for me as well.

I seem to remember a YouTube video from a pair of economic professors who cautioned about the use of fiscal stimulus to try to combat a recession caused by a shift left in the supply curve. I just wish I could remember who.

Silly. Fiscal "stimulus" can't be worrisome when it does not exist. An increase in the fiscal deficit "stimulates" aggregated demand only if the Fed buy that new debt in addition tow whatever it would have bought without the deficit. That may have been the case in 2009 when QE was being severely criticized because it was going to produce hyperinflation, but now?

Central Banks' job in developing countries such as India is even tougher with migrant workers not available for production when demand is coming back. In turn, wages for production workers are rising, possibly adding to inflationary pressures. In contrast, the government is imposing price controls in some sectors which may artificially keep price pressures low, but suppress the market signals and overall not good for the economy. very very tricky for central banks.

If by "Should you worry?", Tyler means "Is the probability non-negligible?", then, of course, the Fed can make an error in the inflationary direction. However, I would still guess that the Fed is more likely to err in the deflationary direction than the inflationary one for the following reasons:

1) The Fed's history over more than a decade has been to err in the deflationary direction, and the consensus so far does not seem to be that the Fed should try to correct that. In fact, many people still cite non-Fed reasons for the past undershooting. It does not appear that the Fed has shifted from a deflationary to inflationary bias.

2) Negative supply shocks can trick an inflation-targeting central bank. Negative supply shocks generate inflation that the Fed could mistake for monetary inflation, causing the Fed to tighten unnecessarily. The main potential supply shocks around Covid-19 seem to be negative ones, although I suppose that there is some chance of a happy surprise, say an early vaccine or disappearance of the disease that causes a positive supply shock. However, the Fed's record in recent years when unemployment falls and inflation falls (positive supply shock) has not been to loosen policy. (See historical deflationary bias.)

3) Not sure what Tyler means by inflation being "too high" but one might define "too high" to mean an inflation level that leads to above average NGDP growth. That seems especially appropriate (relative to defining "too high" to mean more than 2%) given the supply shocks that Tyler anticipates and the Fed's dual mandate. The Fed's bias seems to be to focus on its 2% inflation target in response to a negative supply shock (2008 oil shock) but focus on unemployment in response to a positive supply shock or recovery (post-2008 recovery).

So, while the probability of inflationary error is not zero, or even small necessarily, the Fed seems more likely to respond to shocks by erring on the deflationary side than the inflationary side. If the Fed ever started evaluating itself as tending to be too hawkish, then that would be the time to think that it might be more likely to generate too much inflation in the future.

4) Forgot to mention that at the zero-rate bound the Fed seems especially biased towards deflation. Again, many people don't even blame the Fed, attributing the deflation to liquidity trap. So, there does not appear reason to worry (yet) that the Fed will over-correct to the inflationary side.

The Fed's history over more than a decade has been to err in the deflationary direction,
More than four decades.
Not sure what Tyler means by inflation being "too high"
I have never seen a consistent definition of inflation. My best shot at it is the implicit price deflator which waits up to twenty years for prices to settle. So call me in twenty years and I will tell you if we are deflaton or inflation.

So, otherwise any definition I have seen was selected by a preselected index.

What was the few trillion of paper left sranded after the Nixon or Roosevelt shocks? Technically, what is was name of those stranded paper bills? I would have to call that inflation. Then what is it called when we just borrowed it into existence? I would call that deflation in the future because we always tend to do that about one generation after we do the stranding of paper, then we strand the paper. They seem different to me by economists put them in one bag.,

Not sure exactly what you mean by "stranded bills" but they seemed to create lots and lots of jobs.

In the 50s and 60s, a labor shortage was created by forcing women to quit the jobs they proved the could as well, or better than men. In the 70s, the labor market grew rapidly as women fought to get their jobs back along with all the boomers entering the labor market.

The 80s were when some tried to get women out of the labor market, but that collided with cost cutting, and costs are always jobs and wages and benefits, NEVER PROFITS, so women had to stay in the labor force to keep household income from falling. But "cost cutting" always means increasing living costs, which meant households stopped saving in the 80s, and then started going into debt.

It seems to mean the "stranded paper" has been created since the 80s.

How will debt be paid when workers can no longer work, and then they die in debt?

Fresh Air had an author who graduated with a hundred thousand in private student debt he was steered into as a non-white first in family college student just as 2008 happened. After two "best seller" books, he was down to $30k of the $140k he owed and now this happens. And he says he's lucky to be doing so well at 30ish. For me at his age, circa 1980, two "OPEC recessions", high inflation, a job loss, and some bad decisions on my part left me with no debt and $40,000 in cash, because I was lucky. And white. And born an early boomer.

My parent's generation had both cash and substantial equity in anything with debt, and new cars were radically getting outrageous 4 year loans, instead of 3 or less. Home mortgages were always paid off so homes were owned free and clear by 50ish.

As for government debt, the several wars had been paid for, and the then government debt circa 1980 was for real capital assets: a huge military with too many weapons, too many bases, virtually new superhighways, half the roads build in the past 30 years, lots of recent water and sewer, lots of new schools, etc, in lots of new cities, with taxes and fees easily covering debt service on both old and new debt for lots of new capital assets being built for a rapidly growing population of boomer households with fewer kids, but several times the square feet and several times the land they were born into. In the 70s, Federal debt financed sewer treatment plants across the nation, for example, ending dumping raw or slightly treated waste water in rivers and lakes.

Conservatives defined building public capital as wasteful spending because it wasn't private held assets that could produce economic rents by keeping the capital scarce. Today, land served by capital built 30-50 years ago is inflated in price, not because land is scarce, but because too little public capital has been built to open up new land. But public debt is much much higher because debt funds consumption instead of building capital. In California towns have been abandoned because transportation assets have been cut, making them unacceptable for businesses and home owners. California has plenty of land, but too little public capital to allow use of 90% of California's land. For example, Callifornia City could have a million plus people like nearby LA, instead of 15,000, but no Interstate runs through it.

“... because I was lucky. And white. And born an early boomer.“

Same for me. Except I’m a mid-boomer.

As they say in comedy ... ‘Timing is everything.’

Potential inflation is the least of our problems. Households have various nominal obligations such as mortgages, rent, car payments, credit card debt, and student loans (fortunately, payments for federal loans have been deferred already). Small businesses have rent and debt payments to make.

I haven't seen anyone argue why rising prices are a bigger threat to the economy than the households and businesses as described above all failing to meet their obligations at once. Going back to work a few months earlier but with 10% higher prices is a better outcome than being unemployed long-term, losing one's house and car, and having one's credit ruined.

Stagflation is not an improvement.

The relevant alternative isn’t a great economy, but economic depression. Stagflation is far preferable to blowing up the financial system again, with an accompanying decade or more of high levels of unemployment.

That’s not the tradeoff. People will go back to work when they feel safe from the virus and when restrictions are removed. Printing more money isn’t going to get people back to work faster, it’s just going to add inflation on top of other economic problems. This crisis is due to a problem in the real economy (i.e. the virus and associated restrictions), not a nominal problem.

We gave people a thousand bucks. To those that lost their jobs. Who are refusing to pay their landlord. While everybody else is too scared to leave the house. Leaving most businesses high and dry or worse, closed or worse than that, bankrupt. The risk of deflation and demand destruction is far worse than inflation. You can't print the virus away but you can print some consumer confidence into the system.

People will go back to work when they feel safe and when employers are willing to hire them because they are confident there is a strong market for whatever they are selling and when said employers are not using up too much of their cash making rent and debt payments.

To be clear, I don't think inflation will help the situation too much but worrying about inflation and tightening monetary policy will make the situation much worse.

The Fed error gets reflected in seigniorage taxes, the implied gain to Treasury.

The error therefore is whether we want to pay that Fed fee down at the retail banking level. Will we retail clients go on strike or be squeezed?

If we refuse to pay it, money goes back to the fed, the net treasury gain goes away, Treasury freaks and we have a meeting of the elders for partial default.

If the squeeze continues we will happily pay banking fees for it from the love of country, retail consumption resumes, sales taxes might just save the cities and Treasury gets its tax income.

Liquid asset markets clearly indicate disinflation going forward.

Nouriel Roubini is pessimistic, really pessimistic, and has a list of reasons why. Here is the fourth (and related to Cowen's post): "A fourth (related) factor will be currency debasement. As central banks try to fight deflation and head off the risk of surging interest rates (following from the massive debt build-up), monetary policies will become even more unconventional and far-reaching. In the short run, governments will need to run monetized fiscal deficits to avoid depression and deflation. Yet, over time, the permanent negative supply shocks from accelerated de-globalization and renewed protectionism will make stagflation all but inevitable."

This situation is unique, combining not only demand shocks and supply shocks but a politically motivated de-globalization that will greatly exacerbate both. The war against a contagion is a war we did not choose but a war science will eventually win, but the war against trade is politically motivated suicide.

Chinese factories have loads of spare capacity with no remedy in sight. Day to day products will not be going up in price until demand returns or China loses workers to another wave of covid. Demand won't return until jobs return and China (it's factories) will lock down before that happens. Their factories are on site dormatory living, easy enough to protect.

Even non China goods such as cars and appliances are stuck with current or lower prices. Picture an auto maker or appliance manufacturer raising prices right now, not happening.

Food. Supply disruption could inflate prices but 1) the food is there, just on the farm 2) while some profit taking will happen in distribution they don't want the evil doer spotlight from media and Trump 3) if it gets bad the government will intercede.

Services. While wages SHOULD go up, they won't. When you have as much unemployment as we do people desperate for jobs will take too little for their effort. The most desperate break ranks causing their leverage to fall apart.

Housing? Don't see that happening outside of a few enclave cities.

Even healthcare costs appear to be in decline as people forgo elective intervention. There are refunds being issued to healthcare plans.

What specific products/services are going to go up? Be specific and chart the flow otherwise you're falling into the trap of big picture thinking when inflation is a product by product l, step by step affect (ignoring monopolist pricing power; see above about evil doer spotlight). Of the items that do go up what percent of the economy is that?

Inflation is not product-by-product. Print enough money and you’ll get inflation across the board. Cheap Chinese goods haven’t prevented hyperinflation in Venezuela, Argentina (which also had plenty of food), Zimbabwe, etc.

That's what they said last time. Didn't happen. Prices have to go up for inflation to happen and each item is a multi level decision by a host of independent invisible hand actors.

Could terrible inflation happen if they go way beyond what they've done? Yes, if course. But in the current state and even more the reality above is what I see and forecast.

What is the Model of Fed behavior? And what is "too high?"

Since 2008, including the depth of the financial crisis recession, it failed to meet its own 2% PCE target,if there were its real objective. Since February inflation expectations have collapsed; the TIPS break even rate over the next FIVE years is less than 1% pa. Inflation hawks have the opportunity to make a LOT of money if they bet their predictions.

Now it is true that if the Fed were to adopt a NGDPL target, that would mean during the recovery inflation would exceed 2% PCE, but that is not "too high" inflation.

The markets are suggesting low inflation expectations going forward, and I hope those expectations are right, but the markets totally failed to anticipate the global pandemic until the last week of February (the markets were faster than the politicians and the general public, granted, but not the immediate adjusters to new information that EMH predicts), so there’s at least some question about how sure we are that the EMH applies to this kind of completely unprecedented situation.

Thus, I believe there is still a significant risk of higher inflation. The sheer amount of money being printed is unprecedented. Sure most of that might be sitting in people’s and companies’ bank accounts for now because of the high level of uncertainty, but at some people that is going to get spent, and that is going to mean higher inflation especially if the supply side of the economy is still suppressed. If we see a fall in global trade and reduction in the dollar’s role as reserve currency (I recommend Ray Dalio’s series on this), then I’d expect inflation to go even higher as there will be nowhere for the extra debt incurred by the government to go except through monetization.

I’ll add that I’m already seeing some inflation in food (which is most of my spending since March). Grocery stores and restaurants were having constant discounts and special offers in March and these are all gone now. Prices of many things I buy regularly have also ticked up a bit. The statistics may not be fully capturing this inflation because people’s consumption baskets have changed so rapidly.

There's no inflation in food and least not from supply. It's so high relative to demand that farmers and food businesses slaughtered the chickens, dump the milk, destroyed the eggs, plowed over the vegetables. Other products got turned into pet food. Food is also being wasted away which would have gone to chain restaurants, hotels, hospitality businesses, etc.

If you are seeing higher prices that could be a problem with price gouging and some businesses like Cal Maine are being sued by the state of Texas.

I disagree strongly with FGJ's analysis. That poor analysis relies on anecdotes rather than starting with observed inflation and then seeking to explain it.

Food at home showed a 2.6% seasonally-adjusted monthly price increase in the April CPI report. It's up 4.1% over 12 months. ( )

What FGJ is referencing are largely supply chain issues. The restaurant / food service supply chain has some degree of separation from the at-home supply chain. It's everything from some tendency toward a different mix of food to separate facilities to different packaging sizes.

What FGJ refers to as "price gouging" is largely (if not completely) price signals reflecting bottlenecks in processing.

Also not surprising that price signals currently take time to elicit a response through the food supply chain. At the processor level, what sort of ROI does one need to see to undertake large capital expenses tied to the current situation? I'd argue that it's logically higher than typical right now, because there's a question if current spending patterns will persist beyond a period of perhaps 6 months to 2 years. Capital projects also take time, as do any changes that flow back to the farm level (amount of time to raise animals, growing seasons for crops).

Why do you imagine the money piling up in bank accounts more than you imagine the foregone rent?

These are my guesses...

We temporarily stopped producing things people can live without. (Restaurant meals, hotel stays, flights, etc.) That means the supply shock is matched by a demand shock so I would not necessarily expect inflation. Inflation is hard to produce when the American economy has a lot of conspicuous consumption. The American economy is a lot of amortization of product development cost for product variety and the working capital investment to allow many SKUs (stock keeping unit identifiers). Incremental money will just be parked in accounts just like it was for QE1, QE2, and QE3. As for food, or anything physical, I believe supply constraints are weak. If too many meat cutters have the disease it does not take long to train a replacement worker. Eat a little more oatmeal and a little less bacon for a little while or even for the remainder of your life it will not make much difference to your enjoyment. In a globalized world physical products are the new commodities, that is, there is plenty of competition so inflation risk is low. There is a comment on de-globalization to follow.

The real inflation threats are something that affects the economy broadly. A broad inflation threat for example is a disruption to crops that will affect all kinds of food, both animal-based or plant-based. Another is labor force participation growth which affects demand for all kinds of products and services. Another is population growth. Another is Inflationary expectations. Another is de-globalization which will affect many kinds of products.

I don't anticipate the virus will kill all kinds of crops. I don't anticipate labor force participation growth like in the inflationary 1970s when it was also coincident with a more effective OPEC. I don't anticipate an acceleration in U.S. population growth. I don't anticipate policy makers will neglect to manage inflation expectations. I anticipate only modest amounts of de-globalization. It will involve national security. If your car's wiring harness was made in the Thailand or your refrigerator in China or computer display from South Korea is not going to worry anybody. Does a medical glove count as a national security concern? I don't know but for many things it makes more sense to keep importing them from Asia to build a stockpile. Low interest rates incentivize stockpiling. If there is low inflation then there will be low interest rates. If the upstream crops are okay and inflation expectations are managed then there is only modest risk of high inflation.

But, as things stand, the countries that look most fiscally exposed are Japan and Italy. The former has been unable to get inflation up for years.

Isn't that truly awful? The Japanese haven't seen their savings, for centuries regarded as a wise policy, successfully eroded by central bank machinations that are used to churn a debt-based economy.

Price inflation, judged against that same old bundle of goods?

Seems impossible to have an opinion, or a worry, about something so up in the air. We have to cross a few bridges before we get to that one ..

Excess money doesn't doesn't jack up consumer price inflation anymore. "Too much money chasing too few goods" isn't a thing anymore - this is not 1980. Asset inflation is the threat. That is how you get the stock market, the bond market, and home prices all within a few percentage points of all-time highs - in the midst of the worst depression in almost a century, and possibly ever. The Greenspan put and the Bernanke put cannot hold an LED to the Powell put. The former did not prevent progressively worse crashes - not just of the market variety, but of the economic variety as well. But *of course* this time it's different...

There is certainly something to this. Something about the wiring of our new economy has made money flow really efficiently into assets.

And in the long run nobody sells because that's the nature of our retirement system?

It might tie into the impact of the 401k.

Maybe we should invoke the socialist critique that most government assistance goes to rich people.

Nothing in any of these comments is remotely correct.

the savings rate is about 7%. Is 7% most? Are you pulling things out of your ....?

90% of the Trumpbux stimulus was spent in the first two weeks of receiving the bux. It didn’t go to pushing up asset prices, it went to living expenses

The new wage floor of $600 a week plus unemployment means minimum wage workers are now earning >$40,000 (inb4 prior says what’s German for annualized). This money has gone to living expenses, not assets

The guy with who never posts links for anything puts up a bunch of numbers and accuses somebody else of inventing things..

When that other person didn't actually claim any numbers. He actually proposed a stylistic model.

As an aside, one problem with your own stylized facts is that you continue to believe that everyone who is stylistically unemployed is actually collecting unemployment.

Speaking of actual numbers, it would be interesting to know the ratio. What fraction of small sole preparatorships got no business?

Are we in what Nassim Taleb calls extremistan? What macro economic model in use has seen the variations that we experienced over the last couple months?

Last month Canada saw slight deflation. I'm paying 99c /litre for fuel. But I purchased two industrial pieces of equipment one month apart, mid February, mid March, one for $10,000 and a month later $12,000. German manufactured, same equipment. Mostly to do with currency fluctuations.

The people I'm dealing with are finding things are taking twice as long to do, but they are half to 3/4 staffed. Demand is down, but costs are up.

I did a job with a crane operator yesterday. He is working right now, laid off his employees. Jobs scheduled for the fall and winter are being cancelled. He has 6 machines all parked in his yard. Construction hasn't been shut down in this Province. I suspect banks are getting nervous. Their commercial portfolios likely are, I think the term of art is fu*ked, and on the residential side pretty close. A housing development project that was just about to start digging holes was cancelled this week.

The mood has changed from 'this is bad, let's see what happens' to 'these streets are going to look like three weeks ago in the fall, not from fear of a pandemic'.

The mood right now is if a regulator even thinks of asking for more of something the investors/ business people will leave the room. And they are starting to crawl out of their bunkers again.

The short answer is no. The biggest price deflation we have seen recently has come from the global oil price drop. Inflation hasn't really moved for anything because a lot of our current woes are demand side. The Fed is trying to prevent deflation right now, it's unlikely with so many people unable to work that it will go up. Throw in the fact that we have gone beyond price controls, we have shopping controls. Even if you wanted to go out and spend money, you can't with so many places shut down or reducing hours and availability.

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