…the week than with a bit of Fed’ish macro.
I’m resigned to the 25 bp increase (0.25%) the Fed is expected to announce later this week. After all the telegraphing/forward guidance to that effect, it would be disconcerting for them not to do so, suggesting there’s something wrong they’ve been hiding from the rest of us.
Then there’s this interesting WSJ piece out this AM on the difficulty economists, including those at the Fed, are having in understanding inflation. The piece suggests these reasons for the disconnect:
—demographics: Aging demographics tilts population shares towards those who spend more meagerly out of savings and this weakens demand. If you go to Alvin Hansen’s original thinking on secular stagnation, he stresses demographics as well, specifically slower population growth. BTW, this suggests that demographic variables such as the share of the population over 65 should load negatively in Phillips Curve models. The exercise is left to the reader (let me know what you find; my guess is it’d be hard to tease out this signal).
—temporary factors: This is the Fed’s main explanation. Chair Yellen has suggested that the oil glut and the strong dollar are tamping down the usual correlation between slack and prices, and once they fade, the “Phillips Curve” will spring back into action.
—globalization: Much more extensive supply chains mean a lot more global price competition and this holds down prices in ways historical models fail to reflect. This implies the Fed has less power than they think to move inflation around.
—there’s still slack: It’s not just that temporary factors are masking inflation. It’s that output gaps remain large enough to dampen inflationary pressure. That’s implicit in my WaPo piece today and would militate against a preemptive rate hike.
—who knows?: Economists don’t really understand what drives inflation these days. A key point here is that we’ve learned that wage growth doesn’t map onto price growth the way the classic model predicts. That’s a big change, one Yellen herself has endorsed. And a reason for the Fed to allow some wage growth to persist before giving the brakes another tap.
My take is that globalized supply chains are more important than inflation modellers typically realize. I’ve not thought enough about the demographic point, but there may be something there as well. And, of course, I’m a big advocate of the view that there’s still slack in the job market (the underemployment rate is 1.4 points above what I believe to be its full employment rate of 8.5%).
Finally, I get that everyone wants to make snazzy graphics that don’t just have the same old lines on the graph. But I stared at this graphic in the WSJ piece for about half-a-cup of my AM coffee, thinking surely as the caffeine did its work, I’d see what they were getting at. But to no avail. Perhaps that’s because I’m pretty color blind–I think they’re trying to show the sort of thing you see in the second figure here, plotting actual inflation against the Fed’s optimistic forecasts–but more likely, this is just a not-very-intelligible way to plot the data.