Happy Sunday everyone, I would like to highlight this recent Project Syndicate article by Joe Stiglitz “Victory Lap for the Transition Inflation” – not least as it echoes many arguments I had made here: Correlation does not imply causation: the case of higher interest and lower inflation rates. Those are, in a nutshell:
- Yes, inflation was high for longer than thought.
- The driver behind those price increases was a series of supply disruptions and sectoral shifts in demand.
- And now, inflation rates are falling as these supply-side shocks are fading.
- Tighter monetary policy, in contrast, has not yet played an important role in bringing inflation rates down. It may have helped to keep inflation expectations anchored, though. The drag of higher rates on the economy is yet to be felt – and will potentially put further downside pressure on inflation rates.
- Financial markets (read: bond markets) largely seem to agree with this diagnosis, as indicated by relatively stable inflation expectations and bets for renewed rate cuts before the middle of next year.
While many of us have failed to correctly predict the degree of the inflation surge (Project Syndicate has an article on that as well [Link]), it is now important for economists to correctly identify and understand the causes of the price increases. And on this one, I completely agree with Stiglitz:
“... careful studies of the timing of price increases and the magnitude of aggregate-demand shifts relative to aggregate supply largely discredited the inflation hawks’ aggregate demand “story.” It simply did not account for what had happened. […] Fortunately for the economy, team transitory was right. Let us hope the economics profession absorbs the right lessons.“