A COUPLE OF THINGS WE TRULY DON´T KNOW ABOUT INFLATION / THE NEW YORK TIMES OP EDITORIAL

A couple of things we truly don’t know about inflation

By Paul Krugman

Illustration by The New York Times; images by Visoot Uthairam and artisteer/Getty Images

Economists have been arguing fiercely about inflation for around two years now, and that’s fine.

The pandemic disrupted business as usual, led to some extraordinarily large policy responses and was followed by a large rise in inflation. 

Of course people are debating the extent to which inflation was caused by pandemic disruptions as opposed to excessively expansionary policies; we’ll probably still be arguing about what really happened in 2021-22 decades from now.

That said, there’s a sour tone to the current debate, with more than a hint of ad hominem attacks, that’s making it hard for me to read much of what’s being written. 

I mean, we’re not talking Tucker Carlson-level invective, but there’s more ugliness than one usually expects over what are, in the end, highly technical issues.

For what it’s worth, I don’t think much of this ugliness is being driven by partisanship. 

While Republican politicians are indeed screeching about inflation, they’re so detached from reality that they aren’t part of the discussion within the economics community that I’m really talking about.

What’s going on there, I believe, is that a genuinely confusing situation has created fertile ground for a clash of egos. 

(Well-known economists have big egos? Who could have imagined that?)

So I thought I’d use today’s newsletter to talk not so much about what we know about inflation, or my own view of what’s going on, as about what we don’t know.

The background here: In early 2021, some economists warned that expansionary fiscal policy and loose monetary policy would be highly inflationary. 

As inflation began to rise, some of us argued that it was mainly “transitory,” a result of pandemic distortions that would fade away.

But inflation went far higher for longer than we expected, and at least some of Team Transitory issued mea culpas, while some of those who had predicted inflation doubled down on their pessimism, with warnings of many years of stagflation to come.

Then the inflation numbers began looking much better, and extreme pessimism began to look silly. 

But the story wasn’t over; in recent months the inflation picture has begun to look somewhat worse again, and there has been a palpable push by extreme inflation pessimists to insist that they were right all along.

I don’t believe they’re right. 

But maybe the crucial point is just how murky the situation is.

The truth is that we don’t have a very clear picture of what’s happening to inflation right now.

Partly that’s because the economy is going through a period of unusual shocks. 

There’s a long and honorable tradition of estimating “underlying” inflation by excluding food and energy prices, which are known to be highly volatile. 

But in the postpandemic economy many other prices have been erratic, too. 

For example, although used car prices are a fairly small part of overall spending, they’ve fluctuated so wildly that they’ve been having a big impact on inflation rates. 

Official shelter prices — both actual rents and “owners’ equivalent rent” — have become really problematic because these prices lag behind market rental rates by a year or more. 

And shelter is a huge chunk of the Consumer Price Index.

The response of many economists to these distortions has been to construct measures of underlying inflation that exclude these newly problematic items. 

But there are also big problems with using such “artisanal” measures (a term I’m stealing from Justin Wolfers). 

First, the more stuff you exclude, the more likely it becomes that what’s left is being driven by prices that are quirky or poorly measured. 

Second, the temptation to pick a measure that tells you what you want to hear can be overwhelming, even if you think you’re doing your best to avoid that.

And it gets worse. 

Predicting the future has always been hard, but these days it’s becoming tricky even to predict the past: The statistical agencies keep making large revisions to older data. 

At the beginning of this year, consumer price data seemed to show a significant decline in inflation over the course of 2022. 

Then the Bureau of Labor Statistics revised its seasonal adjustment factors, which had no effect on inflation for the year as a whole but made inflation look lower in early 2022 and higher later in the year. 

The numbers still show improvement, but it’s sufficiently less significant to curb many economists’ initial enthusiasm.

Here’s the overall inflation picture, before and after the revision:

The past is not what it used to be. The green line represents pre-revision measures, and the red line represents the new numbers. ALFRED

Or take another survey, which measures labor costs. 

Revised numbers were released yesterday. 

According to the previous release, workers’ hourly compensation in nonfarm business was rising by 3.4 percent in the third quarter of 2022; the new estimate is 8.2 percent. 

Some inflation pessimists are claiming vindication; I look at this revision and conclude that this data is too erratic to be of much use.

And there’s more. 

A rising number of U.S. businesses just aren’t responding to government surveys, calling those surveys’ reliability into question. 

Right now, official measures of job openings show an extremely hot labor market, but private-sector measures show significant cooling. 

Ordinarily, we’d treat the official measures as the gold standard here — but this time … maybe not?Hot or not? It depends on who you ask. Peter Berezin

So what do we know about inflation and the general state of the economy?

Underlying inflation probably has come down since early 2022 — you really have to work hard to find measures that don’t say that. 

But we don’t know how much it has come down.

Inflation is still, however, running significantly above the Fed’s 2 percent target.

Elevated inflation isn’t a mystery: The economy still seems to be running hot, despite a series of interest rate hikes from the Fed.

So far there is no evidence that inflation is becoming entrenched, so we will have to go through an extended period of high unemployment to get it back down. 

I’m not saying that it can’t happen, but as far as I can tell, there is no evidence supporting fears of ’70s-style stagflation.

Given this picture, I don’t see how the Fed can avoid continuing to raise interest rates until it’s more or less unmistakable that inflation is coming under control. 

On the other hand, there doesn’t seem to be any reason to panic. 

The Fed is creeping its way forward through a dense data fog, and this suggests to me that it should avoid drastic moves in either direction.

And for our part, economic observers may want to take a deep breath and cool some of the rhetoric. 

The truth on inflation has gotten harder to discern, and that fog isn’t something a clash of egos is going to clear away.