How Goldilocks Came to the American Economy

Earlier this year, many economists had a very gloomy view of the Great Recession and the prospects for slowing inflation without a large rise in unemployment. A leading economist declared that core inflation was at least 4.5% and that “all the expected saviours” – meaning the forces that could have brought inflation down painlessly – had “come and gone”. Inflation, another reported, “is stuck around 4-5%.”

Based on these expectations, what actually happened was a LittleOr not so small Miracle. Growth has been strong in both GDP and employment. But standard measures of core inflation are now below 3%. And below. More sophisticated statistical models Central Reserve of NY They tell the same story and claim that core inflation has halved from last year’s peak.

Now, there may be some bumps in the coming months, mostly related to technical issues. Government statisticians have no problem estimating egg prices; But while they do their best, the methods they use to estimate prices for services like health care can sometimes produce unreliable results that add noise to the data. No, the cost of health insurance did not drop 30% last year. And because of the noise in the data, there could be some bad inflation numbers in the future.

however, A sharp fall in core inflation this year is clearly real, and is corroborated by many other sources, especially business surveys. Voters, especially Republicans, may believe or claim that inflation is continuing to rise, but even if this belief is politically important, it is false.

So the big economic question at the moment is: What went well? How did Goldilocks arrive in the US economy?

pointed out Mike Konzalof Instituto Roosevelt, there are two main stories that explain why US inflation has fallen so quickly and so painlessly. These stories are not rationalizations after the fact, but put together to make sense of events that no one expected. On the contrary, many economists, including myself, told these stories even in our winter Inflation DiscontentThey argue that the soft landing we’re experiencing now — inflation without recession — is actually possible.

A point for optimists. But for reasons I’ll explain in a minute, it matters which of these two optimistic stories is correct.

One of the two optimistic stories goes by an unpleasant name.”Straight line Phillips curve”. The same can be said in Spanish. In normal times there appears to be a negative relationship between unemployment and inflationBut it is very weak, indicating that it is strategic Central Reserve To reduce inflation by raising interest rates, thereby reducing global demand, would have to cause a lot of unemployment for inflation to return to an acceptable level. However, the argument is that in an overheated economyIt seems like last year, The relationship between unemployment and inflation is very closeSo the Central Reserve A large drop in inflation requires a small increase in unemployment.

I think the other hopeful story has a better name, though I think I made it up myself: Long unstableA play on words with Covid is long. In early 2023, the argument was that inflation was higher due to persistent supply disruptions caused by the pandemic, but that Inflation is now coming down as the economy is finally getting back to normal.

Both ideas may be true. But the Straight line Phillips curve Explains why inflation will decrease with a small increase in unemployment; It doesn’t do a very good job of explaining what we’ve actually seen, with inflation falling without any rise in unemployment. (Augustine’s minor rebound may have been a statistical flip.)

If you kill It tries to solve the question by comparing inflation between different goods and services. If supply-side improvements are the main story as a result of the epidemic fading, he argues, we should see inflation for goods and services that are in high demand fall faster because their availability has increased. That’s what we actually see.

Why is this controversy important among inflationists? By Concerns that inflation will pick up again if the economy is strong.

Above all, If one believes that inflation fell rapidly due to cooling demandBecause you have to worry if the economy heats up again feeder If it stops raising rates too soon, inflation could rise quickly. It is much less of a concern if we look primarily at the effects of normalization. Post-Covid.

So I see growing evidence in favor A long medieval history is reassuring. Of course, he said, policymakers need to be vigilant.

This debate is probably far from over. However, the perception that inflation has fallen much faster than pessimists predicted should not be a problem anyway.without any visible cost.

*This article originally appeared in The New York Times.