Gongol.com Archives: July 2024
July 12, 2024
We're still learning about inflation
Anyone who learned economics prior to the turn of the century may be forgiven for anchoring their expectations of certain variables in places that may no longer make sense. For instance, the prevailing wisdom of the time -- even among those authoring then-contemporary textbooks -- was that the natural rate of unemployment was probably around 6%, and that lower rates would trigger inflation. It seems like that figure may be closer to 4% today. ■ We're experiencing inflation, but more likely due to the shocking things done to expand the money supply in and following the pandemic of 2020 than the rate of unemployment. And there's evidence to believe that we're still processing some of the lingering side effects of massive interventions conducted in the 2008 financial panic. Lots of people and institutions pulled way back from old, more excitable habits: Things got weird around 2008 and then stayed that way. ■ Economist Greg Mankiw makes a pretty compelling case that there is still a relationship between unemployment and inflation, but that it's very hard to make much use of either side of the trade-off in time to make monetary policy respond usefully: "The problem is that because we don't know the natural rate of unemployment with much precision, it is hard to disentangle supply and demand. That is true even with the benefit of hindsight, but the task is even more formidable in real time when data are preliminary and incomplete." A lot of this may sound like inside baseball to people who don't follow economics in detail, but perceptions of inflation are casting a huge shadow over the 2024 Presidential election. ■ Prudent management of the money supply is the chief job of the Federal Reserve, which is supposed to be managed apolitically and in the best interests of the country as a whole (which generally seems to be the case). But when people exhibit strong feelings about forces they don't fully understand and mostly cannot control, it's a subject worth lots of study.
