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Real Time Economics |
Welcome to a Saturday edition of our economics newsletter focused on inflation. This report aims to offer fresh insight on a key economic topic of the day, and a broad roundup of coverage from the WSJ and elsewhere. You can send any suggestions for future editions by replying to this email. —David Harrison |
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Three Questions for WSJ Chief Economics Commentator Greg Ip |
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Question: You wrote this week that economists badly missed the rise in inflation but haven’t spent a lot of time trying to figure out what went wrong with their theories or models. Why is that? Greg: Compared to the financial crisis or Covid-19, economists regard inflation as a “solved” problem. Most blamed this inflation either on supply shocks due to Covid and war that were impossible to predict or model, or because of monetary and fiscal stimulus pushing output above potential, consistent with existing models. I don’t find either satisfying. I think this inflation could only happen with a combination of high demand and constrained supply. Ordinarily, supply is quite elastic; in economics, we say the supply curve is relatively flat, as shown by the dotted blue line in the chart below. Higher demand—a rightward shift in the demand curve—mostly leads to higher output, and only slightly higher prices. For example, after the Fed slashed rates in the wake of the Sept. 11, 2001, terrorist attacks, light vehicle sales jumped 15% while prices rose only 1%. But since early 2021, disruptions have made the supply curve almost vertical in many sectors: Higher demand has increased prices much more than output, i.e. supply is inelastic. First-quarter auto sales were down 17% from late 2019 while prices were 15% higher. The good news, as Fed Chairman Jerome Powell hinted at this week, is that a big drop in demand—as the Fed is trying to engineer—might therefore reduce inflation without much hit to output. |
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Question: Did anyone get inflation right, and if so, what can we learn from that? Greg: I’d group those who predicted higher inflation broadly into two groups. One, which includes Larry Summers, Olivier Blanchard and Michael Strain, thought President Biden’s stimulus, in combination with wealth effects from higher asset prices and the Fed’s low interest rates, would push demand up enough to more than fill the “output gap.” They got the direction right but I don’t know if they got the timing or magnitude right since none issued an actual forecast, and mainstream output gap models do not explain the rise in inflation. A second group, citing the big increase in the money supply (for example John Greenwood and Steve Hanke) or government debt (for example John Cochrane), invoked simple models such as the quantity theory of money or the fiscal theory of the price level. But similar arguments were made when the money supply and government debt rose sharply in 2008-10. They were wrong. |
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Question: You noted the dearth of academic papers exploring the surge in inflation. Is that going to change? Is there anything promising out there? Greg: I put this question to Emi Nakamura and Jón Steinsson, both of the University of California, Berkeley, frequent co-authors on inflation papers and joint heads of the monetary economics program at the National Bureau of Economic Research. “We definitely plan to have these issues figure prominently in our agenda and program going forward,” Mr. Steinsson said in an email. “This event will hopefully allow us to substantially improve our understanding of certain situations, in particular, situations where the economy is hit by very asymmetric shocks across different sectors. I do think one can fault the profession for paying too little attention to this in the past (just like the profession paid too little attention to housing and financial crises before 2005).” One important area of study is whether the unemployment rate still serves as a gauge of economic slack. While the jobless rate is now “almost exactly the same as before the Covid crisis, there are a lot of other indicators that the labor market is a lot ‘hotter’ (relative wage increases at the bottom of the wage distribution are probably one symptom of this),” Ms. Nakamura notes. “Very few economists predicted the persistence of the labor market effects of the Covid crisis … in particular, the big decline in labor-force participation.” You can read their comments in full on my Twitter feed. Meanwhile, here are two papers exploring how a shock that helps some sectors but hurts others has unusual inflation dynamics: one by Iván Werning of the Massachusetts Institute of Technology and three co-authors presented at last year’s Fed conference in Jackson Hole; and one released this year by Fernando Cirelli and Mark Gertler of New York University. |
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Due to the Juneteenth holiday in the U.S. the Real Time Economics newsletter will not publish on Monday, June 20. The next edition of the newsletter will be on Tuesday, June 21. |
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Tuesday: After a red-hot streak during much of the economic recovery, the housing market has hit a rough patch, brought on by rising mortgage rates, a shortage of supply and ever-increasing prices. Existing-home sales have been slipping for the past three months and data for May, set for release Tuesday morning, could well show another decline. Economists surveyed by The Wall Street Journal expect a 3.6% decline. The housing market looks to be one of the first sectors of the economy to be significantly affected by the Federal Reserve’s aggressive interest-rate increases. Housing data will offer a hint at how severe the downturn will be and whether it could spill over into the rest of the economy. |
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0.75% The amount by which the Federal Reserve raised interest rates following its June 14-15 meeting, the biggest increase since 1994. Fed officials have grown increasingly alarmed that high inflation could become entrenched in the U.S. economy and have vowed to become more aggressive to bring it under control. |
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-0.3% The decline in seasonally adjusted retail sales in May from the previous month, the first drop this year. Faced with rising gas prices, interest rates and inflation, households have pulled back on purchases, a sign of slowing momentum in the economy. |
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$27.8 trillion The amount of equity Americans have in their homes, a record. Total home equity increased almost 20% in the first quarter of the year, according to the Federal Reserve, buoyed by rapidly appreciating home prices. But higher interest rates could make it difficult for people to borrow against that equity. |
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$20 The new average pay for Walmart pharmacy technicians after the company announced it was raising wages for the position. The economy may be cooling but some pockets of the labor market are still facing shortages, driving up pay. |
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Listing Boom. The number of public companies has surged over the past two years, as firms hustle to get listed on one of the main stock exchanges. The number of listed companies on the three major exchanges went from 4,144 at the end of August 2020 to 5,301 at the end of December 2021, a 28% rise, write Christine Dobridge, Rebecca John, and Berardino Palazzo in a Fed paper. A little more than half the boom in newly listed companies can be attributed to Special Purpose Acquisition Companies, so-called blank check companies that enter capital markets before merging or acquiring another company. |
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Get Your Lanyards Ready. Few industries suffered as much as the convention center business during the Covid-19 pandemic, as the prospect of eating a chicken dinner with thousands of others in an enclosed ballroom lost its appeal. Now the industry is betting on a rebound, writes Devin Leonard in Bloomberg Businessweek. Some convention centers, as in Calgary, are busy expanding, and architects are pitching their clients on innovative new buildings. In 2019, 35 million people attended professional conventions and trade shows in the U.S. That number plunged to 7 million in 2020. Now, an industry group forecasts 36 million next year, an estimate that could prove optimistic. |
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"We have to restore price stability. We really do. It’s the bedrock of the economy." | — Fed Chairman Jerome Powell |
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