Paul Krugman, Nobel-prize winning economist and New York Times columnist, has conceded that his prediction that the inflationary wave now battering American households would be benign was wrong and he “didn’t see the current surge coming,” though he continues to see the upward price pressures as “transitory.”
“I got inflation wrong,“ Krugman wrote. ”I didn’t see the current surge coming.”
Offering an explanation, Krugman said he “didn’t think the fiscal stimulus early this year would boost demand as much as Summers et al predicted,” he added referring to former Treasury Secretary Larry Summers, who was early to sound the alarm on the current bout of surging prices and has been a vocal critic of the Fed’s easy-money policies.
“What’s happened, however, is that we’ve faced supply constraints, both supply-chain issues in meeting huge demand for durable goods and withdrawal of workers from the labor force, i.e. Great Resignation,” Krugman wrote.
The pandemic-related shift in buying behavior led to a rotation of spending from services to goods, with many products seeing a sharp run-up in prices. This has been exacerbated by supply-side constraints, like a lack of semiconductors, a factor widely blamed for the surging prices in used cars, for example.
“This doesn’t say that the inflation will necessarily be transitory, although I think that’s still the best bet,” Krugman said.
“This is a very good analysis of where we appear to be at right now,” Krugman wrote, with Klein making the case in his post that the current price pressures remain “confined to the same batch of idiosyncratic sectors that have been driving inflation all year.”
“Moreover, measures of actual consumer behavior suggest that Americans are responding to higher prices not by hoarding in anticipation of even more inflation, but by postponing their spending in the expectation that affordability will improve,” Klein wrote.
“The risk is that consumers and businesses start believing that even bigger price increases are coming in the future—and adjust their behaviors in response. That would eventually lead to hoarding, tightening financial conditions, less production, and shortages,” he argued.
“Fortunately, that doesn’t seem to be happening—yet,” Klein wrote.
But with prices running high and little sign of immediate relief, consumer expectations for what the rate of inflation will be in the future have risen to all-time highs.
The sharp rise in the bond market-derived gauge suggests that investors expect inflation to average over 3 percent a year for the next five years and that upward price pressures will be more persistent than the Fed’s “transitory” expectations, potentially forcing the central bank to accelerate its timetable for a rate hike.
Summers told CNN in the interview that he believes the labor market is tight and loose monetary policy is counterproductive.
“We’ve got to recognize our problem is not that not enough people have jobs,” Summers told the outlet. “The current problem is that we are pushing demand into the economy faster than supply can grow and that we are just going to get more and more inflation until we stop doing that,” he said.
“That’s the real problem,” Summers added, with his remarks coming nearly two weeks after the Fed’s policy-setters met and voted to start phasing out the central bank’s $120 billion in monthly asset purchases by around $15 billion per month, while leaving monetary policy broadly accommodative, saying it’s not yet time to start hiking interest rates.
Summers called for a faster taper of the bond-buying program, urging for it to be phased out over three months, not eight.