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I gave the UCSD economic roundtable lecture Friday June 11 on inflation and the future of the Fed. It summarizes quickly a number of themes from previous Grumpy writings, and if you enjoy videos you might find it fun. Youtube link  in case the above embed does not work.  I happened on the New York Fed website , proclaiming on its landing page that it is now "...dedicated to understanding and finding solutions to the numerous forms of inequality that communities of color experience and working with communities in our District to address deep-seated inequities,"  in case you want documentation that the Federal Reserve is taking on inequality and racial issues.  Slides available here . 

This spring's spurt of inflation clearly already means one thing: The end of "the end of inflation."  For 25 years inflation has seemed stuck on a downward trend. Those of us who worry about it seemed like end-of-the-world sign-holders that couldn't leave the 1970s behind. It's hard to buck the trend. A famous economist advised me to give up studying inflation -- inflation is 2%, he said, that's all you need to know. Apparently a new constant of nature.  Well, apparently not. Inflation can happen, and there is an economics of inflation. Right now it's pretty obvious -- supply constraints both natural and artificial, coupled with rampant demand.  Nobody is really sure where it will go. See the IGM survey  for a good indication of how wide sensible consensus is on the issue. Maybe these are just temporary shocks, supply bottlenecks, a one-time price level rise from stimulus. Maybe it is the beginning of the 1970s, when exactly the same excuses were offered...

 The latest inflation numbers are out, up 0.64% from April to May (7.7% annualized), on top of 0.77% (9.2% annualized) from March to April. . To get around the base controversy, I like to plot the level of the CPI:  The graph suggests that  "reflation" from the pandemic recession was over last year, we had been back to the usual growth, and now we're embarked on something new.  Inflation is not the same everywhere. For another purpose I broke inflation down to durable goods and services.  Until about 1985, the three categories moved together. After that we saw a sharp divergence. Inflation depends on what you buy. Services got much more expensive, while durable goods actually saw deflation. The forces are familiar. The rise in skill premium has meant that people got more expensive, and some of that reflects also the rise in cost of businesses such as health care and universities which may have more to do with government payment. Durable goods got cheaper, thank ...

From the lovely Minneapolis Fed website that computes probabilities from option prices.  

This marvelous plot comes from an interesting article, The Monetary and Fiscal History of Brazil, 1960-2016 by Joao Ayres, Marcio Garcia, Diogo A. Guillén, and Patrick J. Kehoe. The article is part of the Becker-Friedman Institute Project , complete with a big and now easily available data collection effort, and forthcoming book .  If you want a deep historical and economic analysis of fiscal and monetary interactions, this is an amazing resource. And it summarizes historical episodes that North Americans just might want to know more about soon!  (HT Ricardo Reis who pointed it out in a great discussion last week, that I will post as soon as it's available.)  To me the graph is at first blush a reminder that inflation can stop on a dime, despite sticky prices, seemingly adaptive or sticky expectations, Phillips curves, and so forth. Brazil seems to have had 6 Tom Sargent "end of inflations" episodes in 10 years! (Reminder: Tom showed that inflation can end very quickly i...

I just got the program for the upcoming NBER summer institute monetary economics conference program .  Who says academics aren't up to the minute on policy issues? This will be interesting.   

Essay at  National Review Online.   Inflation: The Ingredients Are in the Pot, and the Fire Is On. (But will it boil?)  John H. Cochrane and Kevin A. Hassett The end of the COVID-19 recession is in sight. If the Atlanta Fed’s real-time estimate of 8.3 percent Q1 growth proves accurate, real GDP is only four-tenths of a percent below the all-time high from Fall 2019. And the vaccinated, post-COVID boom is on the way. Most people have money, and are ready to spend it. Yet unprecedented fiscal and monetary “stimulus” continues. Is persistent inflation around the corner? Inflation and commodity prices are up sharply. The latest Michigan survey shows people expect 3.7 percent inflation next year. Shortages of everything from lumber to semiconductors have raised input prices for businesses, while the percentage of small businesses reporting that they cannot find qualified workers is at a record high. The ingredients are in the pot, and the fire is on. But will the pot boil? Sin...

This post follow's last week's post on inflation levels prompted by the big March increases in CPI and PPI, and the CEA  tweetstorm  response. (Also a longer post on the chance of inflation.) WIN button from the Ford Administration Is inflation coming?   The CEA goes on to  Over the longer-term, a key determinant of lasting price pressures is inflation expectations.  And takes comfort that survey expectations don't see a large increase in inflation. But when did survey expectations ever predict inflation?  In fact most research on surveys, especially in finance,  is used to claim people are dumb and terrible at predicting the stock market and other variables.  The CEA goes on to  An increase in inflation expectations from an abnormally low level is a welcome development.  But inflation expectations must be carefully monitored to distinguish between the hotter but sustainable scenario versus true overheating.  But  if afte...

 March inflation is up. The CEA delivered a historic tweetstorm . It starts with  temporary factors: base effects, supply chain disruptions, and pent-up demand, especially for services I'm glad for once to have nailed a forecast : That Fed and Administration's first response to inflation would be to invoke "temporary" factors, just as in the 1970s.  We'll see how that pans out.  The CEA goes on to "base effects," In the near-term, we and other analysts expect to see “base-effects” in annual inflation measures. Such effects occur when the base, or initial month, of a growth rate is unusually low or high.. This unusually large price decrease early in the pandemic made April 2020 a low base.  Since this is about the past, we can say something more definite. Yes, if you start from a low base, you can see a lot of growth. To get around the arbitrariness, let's look at price levels. Here is the recent CPI (blue) and CPI less food and energy (red). These ar...

  From Torsten Slok at Apollo. Torsten explains Current pricing for caps and floors shows that the market sees a 30% probability that inflation will be above 3% for the next five years, and a 5% probability that inflation will be below 1%, see chart below. A similar worry about high inflation can be seen in 5-year breakevens, currently trading at 2.5%, the highest level since 2008. A perpetual inflation worrier, I habitually confront the fact that bond prices don't signal inflation. I am forced to point out that they never do -- interest rates did not forecast the inflations of the 1970s, nor the disinflation of the 1980s. And I say inflation is unforecastable, a risk like a California Earthquake.  But for once there does seem some inflation risk in asset prices.   These are option prices. The main forecast remains subdued inflation. But these option prices are pointing to a larger chance that inflation does break out. More risk, not so much a sure thing. Also, it's not r...

The Hoover Economic Policy working group seminars are now online for anyone who is interested. Follow the link and click "news and events." These happen on Wednesdays at noon, and are put up soon after. Interesting speakers, interesting discussion. Here's what's available so far: Michael Bordo and Mickey Levy Wednesday, March 10, 2021 “Do Enlarged Fiscal Deficits Cause Inflation: The Historical Record.” Chad Jones Wednesday, March 3, 2021 “The End of Economic Growth? Unintended Consequences of a Declining Population.”  Eleni Kounalakis And Lee Ohanian “The Exodus of Firms from California: Facts, Reasons, Solutions.”  A Special Event in Honor of Secretary George Shultz Wednesday, February 17, 2021

A history of paper money and inflation in China, from Edward Chancellor's Wall Street Journal review of Jin Xu's Empire of Silver.   In these sparse paragraphs is most of monetary (and fiscal!) theory, along with a history I was not aware of. Paper money, Ms. Xu tells us, dates back to the Tang dynasty in the ninth century, when the authorities allowed merchants to exchange bronze coins for promissory notes, known as “flying cash.” Two centuries later, in the time of the Song dynasty, merchants in Sichuan were using private exchange notes in place of the cumbersome iron coinage. The Song emperor issued his own paper money against deposits of coin. The jiaozi, as these notes were called, proved so popular that they traded at a premium to cash. The convenience of paper money proved its undoing, however. The first temptation was for the Song authorities to make the jiaozi inconvertible, severing the connection with metal reserves. The next step was to increase the issue of paper...

Essay on monetary policy in National Review Online .  Short version: The Fed's monetary policy has returned to the intellectual framework of the late 1960s. At best "expectations" now float around as an independent force, manipulable by speeches, but not tied to patterns of action by the Fed as analysis since the 1980s would require.  If you follow the conventional reading of how monetary policy works, that observation leads to a natural prediction:  we're on the verge of reliving 1970s inflation. (Fiscal policy, entitlements, regulation and cities seem to be headed also to 1970s policy on steroids.)  True, the Fed says "we have the tools" to stop inflation should it break out. But that tool is to rerun 1980. Does the Fed have the will? Will the Fed really induce a 2 year agonizing recession to bring down inflation, followed by 15 years of historically unprecedented high interest rates? Or will the Fed do what it did three times before that -- half-hearted i...

The Fiscal Theory of the Price Level  is a book I'm writing on that topic. It now has a full draft, here .  Comments, typos, suggestions, complaints, parts you find too easy, part you find too hard, things you think are wrong, parts you find repetitive, parts you find need better connection, things I should add, things I should delete are all most welcome!  I also did a 2 hour video mini-course on FTPL for the Becker-Friedman Institute last summer, with slides/notes here.   Update: The video link is now fixed (2/1/2012)