“There is no room for complacency, but no need to panic either.” In the first in a series of guest essays on inflation, AngelUbide explains how it could be tamed without a recession
for two decades, inflation has suddenly risen to heights not seen in 40 years. Is it owing to bad policies, or bad luck? Will high inflation persist, or can it be tamed without a recession? In broad terms, inflation results from some combination of supply shocks, demand strength and inflation expectations. Supply shocks are typically short term and transitory, while demand strength averages out over the business cycle. Only changes in inflation expectations have permanent effects on inflation.
Scarcity of goods and commodities is transitory, though it can endure for a long time. The extent and breadth of current price shocks is of historic dimensions. American core-goods inflation—which excludes energy and food prices—has averaged about zero in the past few decades, but is now running at well over 10%. Barring new shocks, goods prices will at least stabilise.
Second, it is also possible that inflation has become more sensitive to changes in the unemployment rate. But this seems unlikely—at least so far. Core-services inflation, the part of inflation most sensitive to demand, has evolved in line with previous periods of declining unemployment. And the sensitivity of core inflation to unemployment would have had to have increased ten-fold to explain the inflation surprise.
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