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Paul Krugman
Wonking Out: I’m Still on Team Transitory
Opinion Columnist
Consumer prices have risen 4.4 percent over the past six months; that’s an annualized inflation rate of almost 9 percent, which puts us almost back into 1970s territory. And there are plenty of people out there proclaiming the return of stagflation.
But the people in a position to do something about it — above all, Jerome Powell, the chairman of the Federal Reserve — are fairly serene. They insist that we’re looking at only a transitory blip driven by the disruptions associated with America’s emergence from the pandemic. But are they right? How can we tell?
To answer those questions, we need to back up and ask what it means to say that inflation is transitory, anyway. And to do that, it helps to take a long view.
My sense is that many people believe that inflation wasn’t something that happened in America before the 1970s. But that isn’t true. Consumer price data go back more than a century, and there were several episodes of high inflation over that period. The ’70s weren’t even the peak:
What was the difference between the ’70s inflation and the inflationary spikes associated with World War I, the end of World War II or the Korean War? The answer is that those earlier bursts of inflation were easy come, easy go: The economy didn’t exactly return to price stability painlessly, but the recessions associated with disinflation were fairly brief. Ending the inflation of the ’70s, by contrast, involved a prolonged period of really high unemployment:
But what explained that difference? In the 1970s inflation became “embedded” in the economy. The people who were setting wages and prices did so with the expectation that there would be lots of inflation in the future. For example, companies were relatively willing to give their workers wage increases because they thought that their competitors would end up doing the same, so it wouldn’t put them at a competitive disadvantage.
The question is whether inflation is similarly becoming embedded now.
We used to have a fairly easy, rough-and-ready way to answer that question: the concept of core inflation. Back in the 1970s, the economist Robert Gordon suggested that we make a distinction between the price of commodities like oil and soybeans that fluctuate all the time and other prices that are adjusted less frequently. An inflation measure that excluded food and energy, he argued, would give us a much better indicator of underlying — i.e. embedded — inflation than the headline number.
The concept of core inflation has been one of the huge success stories of data-driven economic policy. Over the past 15 years we’ve seen several surges in consumer prices driven mainly by commodity prices and much hyperventilating, mainly on the political right, about the return of stagflation or even imminent hyperinflation. Remember when Paul Ryan, the Republican representative of Wisconsin at the time, accused Ben Bernanke, the former Fed chairman, of “debasing the dollar”?
The Fed, however, refused to back off from its easy-money policy, pointing to quiescent core inflation as a reason not to worry. And it was right:
Unfortunately, at this point the traditional measure of core inflation doesn’t help much, because the pandemic has led to price spikes in unusual sectors like used cars and hotel rooms. So how can we find guidance?
The White House Council of Economic Advisers has been using a sort of “supercore” measure that excludes not just food and energy but also pandemic-affected sectors. This makes sense; in fact, I was arguing for such a measure months ago. But I’m aware that as one excludes more stuff from the Consumer Price Index, one exposes oneself to the charge that you’re saying that there’s no inflation if you ignore the prices that are rising.
Powell has pointed to a different measure: wage increases, which have been substantial in some of the pandemic-hit sectors but overall still seem moderate according to measures like the Atlanta Fed’s wage growth tracker:
Lately, however, I’ve been wondering whether the best way to figure out whether inflation is getting embedded is to ask the people who would be doing the embedding. That is, are companies acting as if they expect sustained inflation in the future?
The answer, so far, seems to be no. Many companies are facing labor shortages, and they’re trying to attract workers with things like signing bonuses. But at least according to the Fed’s Beige Book — an informal survey that is often useful for getting a read on business psychology — they’re reluctant to raise overall wages.
Just to be clear, I’m not celebrating corporate unwillingness to increase wages. The point, instead, is that companies aren’t acting as if they expect lots of future inflation, where they can hike wages without losing competitive advantage. They’re acting, instead, as if they see current inflation as a blip.
So far, then, I’m still on Team Transitory: I think things are looking more like 1951, when inflation briefly hit 9.3 percent, than 1979. And if we finally get this pandemic under control, the inflation of 2021 will soon fade from memory.
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