Below are excerpts from two articles in today's Wall Street Journal.
First, see The Case for a Soft Landing: How High Inflation Could End Without Recession: Dissecting one firm’s view on why inflation will fall to 2.5% without a big rise in unemployment by Greg Ip of The WSJ. Excerpts:
"Economists at Goldman Sachs have long been in the soft-landing camp, putting the probability of a recession in the coming 12 months at 33%. That is higher than normal but less than the nearly 50% average of economists surveyed by The Wall Street Journal. To understand the reasons Goldman expects a soft landing, I talked to its chief economist, Jan Hatzius.
The main obstacle to a soft landing is the historical record. In the three soft landings since World War II—1965, 1984 and 1994—the Fed wasn’t trying to push inflation down; it was merely trying to keep it from going higher. At times like the present, when inflation was too high and the Fed set out to push it lower, a recession always occurred.
But Mr. Hatzius said that is a “small sample,” largely confined to the 1970s and early 1980s, which shouldn’t be extrapolated to today. First, he noted, the public expected much higher inflation back then, and it took high unemployment to change the public’s wage- and price-setting behavior. Expectations today are much lower: The spread between regular and inflation-indexed bonds, for example, projects 2.4% inflation over the coming five years, and surveys by the University of Michigan and the Federal Reserve Bank of New York are in the same ballpark. So getting actual inflation back to 2% doesn’t require stringent monetary tightening.
Second, today’s economy is “too dislocated” by a pandemic, war and other disruptions to apply past relationships between growth, unemployment and inflation, Mr. Hatzius said. For example, he said demand for labor shows up as high vacancies and rapid wage growth rather than unemployment going continuously lower. Conversely, cooling labor demand should manifest itself as lower vacancies and wage growth, not necessarily higher unemployment. Goldman expects the unemployment rate in a year to be 3.8%, not much higher than its current 3.7%.
Similarly, in many goods markets, “You can see very large changes in inflation rates in response to relatively small changes in the supply-demand balance,” Mr. Hatzius said, pointing to used cars, where “we’ve gone from sky- high inflation rates to modest deflation rates.”
To achieve a soft landing, economic growth has to slow below its long-term trend of 1.75%—and it has, Mr. Hatzius noted. Growth was slightly negative in the first half of this year and will be around 1.25% in the coming 12 months, Goldman estimates.
Goldman also thinks the labor market has started to loosen up. The firm measures labor demand by adding total employment to job vacancies, and then compares that with the labor force. While demand still exceeds supply, the gap has started to close. The share of people quitting their jobs has trended steadily lower since December.
Goldman’s wage tracker, which consolidates several different measures of pay, puts wage growth now at 5.5% a year. Mr. Hatzius said it has to fall to 4% to be compatible with 2% to 2.5% inflation, and he thinks that is happening."
It is a long way from July’s 8.5% increase in consumer prices to the Fed’s inflation target of 2%. But that overstates how much work the Fed has to do. Its target is based on a different price index, which was up 6.3% in July, and that was buoyed by food and energy, whose prices were elevated by global disruptions and have begun dropping. Excluding those, “core” inflation was 4.6% in July. Easing of supply disruptions such as for used cars will further lower core inflation with no push from the Fed, Mr. Hatzius predicted.
Finally, Mr. Hatzius thinks inflation only needs to fall to 2.5%, not to 2%, for the Fed to stop tightening. The reason, he argues, is that the Fed wants inflation to average 2% over the business cycle, so it can tolerate 2.5% inflation during a strong economy to offset below-2% readings during recessions."
The second article is Inflation and the Scariest Economics Paper of 2022: To bring price increases down to 2%, we may need to tolerate unemployment of 6.5% for two years by Jason Furman. Mr. Furman, a professor of the practice of economic policy at Harvard University, was chairman of the White House Council of Economic Advisers, 2013-17. Excerpts:
"The paper is a painstaking empirical exploration by Johns Hopkins macroeconomist Larry Ball with co-authors Daniel Leigh and Prachi Mishra of the International Monetary Fund"
"Economists use labor market slack to help predict inflation. Typically they look at the unemployment rate, but using the ratio of job openings to unemployment to measure labor market slack offers a clearer picture. Analysts who focused solely on the unemployment rate mistakenly believed the labor market still had substantial slack in 2021 and deemed wage and price inflation transitory. The big burst of inflation that followed left them scratching their heads. Messrs. Ball, Leigh and Mishra find that labor-market tightness itself added 3.4 percentage points to underlying inflation in July 2022."
"But food and energy aren’t the only things people buy that are subject to supply-side volatility. Prices of new and used cars, for example, have gyrated over the past two years for reasons that are mostly unrelated to the strength of the overall economy."
"The median inflation rate calculated by the Federal Reserve Bank of Cleveland drops outliers to remove these distortions.
Median inflation is a statistically better measure of the underlying inflation that policy makers can actually control. This is worrying because while the Fed’s preferred headline inflation fell to zero in July and annual inflation excluding food and energy has stabilized at around a 4% annual rate, median personal-consumption expenditure inflation shows no sign of moderating and has run at a 6.6% annual rate in the last three months."
"To get the inflation rate to the Fed’s target of 2% by then would require an average unemployment rate of about 6.5% in 2023 and 2024.
There is, of course, tremendous uncertainty with this forecast. If businesses believe that low inflation is coming and act like it, inflation could fall without a large increase in unemployment. On the other hand, if the labor market doesn’t shift back to the way it was working pre-Covid, or if there are more unfavorable supply shocks, the outlook could be more painful."
No comments:
Post a Comment