Is inflation steadily declining? If overall employment is growing strongly, why are tech giants laying off hundreds of thousands of workers? Is the economy headed for a “soft landing” instead of a “hard landing”? Or will it be a “no landing” or a “rolling recession”? If the latest economic news has left you unsure about the true state of the economy, you are not alone.
On Monday, the National Association of Business Economics released its latest survey of 48 professional forecasters. The results were all over the place. The median projection showed inflation-adjusted gross domestic product (the broadest measure of what the economy produces) would expand modestly by 0.3% from the fourth quarter of 2022 to the fourth quarter of 2023. However, the forecast rose from -1.3 percent (a significant drop) to +1.9 percent. This represents a relatively healthy growth rate. And that wasn’t the only thing the forecasters objected to. Inflation, labor market indicators and interest rate estimates are all widely spread and likely reflect different views on the fate of the economy, from recession to soft landing to strong growth,” the association said. said Julia Coronado, chairman of MacroPolicy Perspectives.
The divergence among economists was also evident at a conference on monetary policy held in New York last Friday by the University of Chicago Booth School of Business. A group of academics and Wall Street economists, including former Federal Reserve board member Frederick Myschkin, have published a research paper that casts doubt on hopes that the central bank can cut inflation to its 2% target without triggering a recession. kind of announced. After studying historical periods of disinflation going back more than 70 years and running simulations in economic models, the economists concluded that “the Fed will be able to change policy to meet its inflation target by the end of 2025. “We need to tighten it up significantly,” he said. Virtually all economists agree on at least one thing. The more the Fed continues to raise rates, the more likely it is that the fight against inflation will end in a full-blown recession.
Coincidentally, the Chicago meeting coincided with the release of the monthly inflation report closely monitored by Federal Reserve Board member Jerome Powell and his colleagues. After a steady decline in annual inflation in late 2022, the January update showed him rising slightly to 5.4%. The news has fueled concerns that inflation may be proving more “sticky” than some analysts had hoped. But what is the true outlook for inflation?
With the monthly numbers bouncing around and data revisions blurring the picture, the short answer is that we don’t know. And given what we don’t know, the wisest course of action is to act lightly and wait for more data before the Fed raises rates further. I was shocked. Soaring energy prices caused by the war in Ukraine. And recently, Fed rates have risen sharply in his 40 years. In the wake of these turbulent events, it is not surprising that some long-standing economic ties appeared to have broken down, baffling even experts and pointing out that a cautious policy approach was in order. .
Fortunately, the Fed has at least some of those lines, including Davidson College economist Philip N. Jefferson, who sat on the central bank’s board of governors last May and spoke at the University of Chicago conference on Friday. There are people who seem to be thinking He said some categories of inflation were still “stubbornly high,” but also disputed the conclusions of the paper by Mishkin et al. Jefferson pointed out that the author’s economic model “assumes, like all models, that the past tells us what policymakers need to know.” However, he added, “current inflation dynamics are driven by pandemic-specific factors not seen in historical data.”In other words, economists have never seen an economy like this before. never.
Jefferson also presented a graph (see below) that splits the core inflation rate (that is, the rate of inflation that excludes volatile food and energy prices) into three components. Prices for services excluding housing and energy services. This means hotel rooms, meals in restaurants, medical care, etc. The price of a house that consists primarily of rent. This graph neatly shows how the inflation problem has changed over the past 12 months.
Since the beginning of 2022, the prices of commodities and services, with the exception of energy and housing services, have fallen sharply. But the third component, housing services, is rising sharply. Looking ahead, the key question is whether the two downtrends will continue to fall and whether the uptrend will continue to rise. If the answers to these questions are yes, then the overall inflation outlook is benign. Wisely, Jefferson made no firm predictions. He expressed his conviction that housing inflation would fall soon, with rents falling in many places and turning his attention to other service sectors that are a big part of the economy. One of the biggest factors in determining the price of services, he said, is labor costs, and Chairman Powell recently argued that a tight labor market could drive inflation in services by allowing workers to demand higher wages. I suggested that it might be pushing up. If that’s true, it argues that the Fed should keep interest rates high to reduce labor demand in terms of fighting inflation. . Earlier this month, the White House Council of Economic Advisers released a new measure of wage inflation in the non-housing services sector. This points to a significant drop in 2022.
What’s the takeaway from all this? First, beware of anyone who claims to know exactly where the economy is headed. Secondly, take a moment to sympathize with Powell, Jefferson and his colleagues at the Fed, whose other speaker at Friday’s meeting was Mervyn King, the former chairman of the Bank of England. After providing his own analysis of where the inflation spike came from and how it would be resolved, King said, “I don’t want to advise any central bank on what we should do.” ♦