Milan - you write a real good take. This is as good as anything I've read on the current state of inflation. And I've read a fair amount. Congratulations and keep up the great work. For what it's worth my take is that there should be a soft landing, unless the Fed becomes needlessly sadistic. Among other things, there's this piece by Connor Sen in Bloomberg from 10 days ago:
Anecdotally, the apartment building where my wife and I live while we're looking for a new house is now offering $1,000 bonuses for new renters. When we rented in July, there were only 4 vacancies out of 340 units. Quite the reversal. No one asked but I think by July-Sept core PCE will be in the threes YOY and the fed will be looking at rate decreases by year end. Anyway, your piece was a real pleasure to read. Best regards.
I’m more a dove than a hawk, but Claudia Sahm’s complete apathy toward the inflation rate shows the type of contempt for voters that leads to bad things down the line. We can try to convince people they should care about different things, but we can’t really choose what voters care about, and inflation is very unpopular (I’d argue the same point on entitlements to conservatives who have issues with them - it’s a democracy and voters like social security, deal with it).
I'm actively trying to hire a couple of technical/engineering writers, typically MS with work experience, and it's very rare for me to get writing sample submissions as good as this.
>Food $200
>Data $150
>Rent $800
>Candles $3,600
>Utility $150
>someone who is good at the economy please help me budget this. my family is dying
so I don't know if the conclusions are sound (really just not my area at all), but the writing is very good.
Thanks for referencing the New Zealand target. 2% is totally arbitrary! There's nothing magical around it. The Fed could just as easily say, "we've looked at the data and 3% (or 4%) is a more appropriate target because it gives us wiggle room on the low end of interest rates." The Great Recession should have caused a change in thinking around this, but it doesn't look like it has.
It strikes me there is something really wrong with the CPI measure of rent if the lag is that large. Arguably it a major reason for the Feds policy mistakes - not recognizing inflation when it first started going up, and being too slow to react when it is going down.
"I highly doubt that a college freshman (even one as intelligent, charming, and humble as myself) has a better sense of what’s going on in the macroeconomy than the experts at the Fed or professional bond traders. "
Let's be real here - economic experts almost always get projections wrong. Economics is not a predictive science, as has been shown time and again, most recently with the vast majority of them believing in the "transitory" hypothesis. There is no reason to think that your calculus and arguments are any less likely to be accurate than theirs.
My own non-expert view is that the fed should hold off on further increases and see what happens with the ones it's already done, since interest rate increase have lagging effects.
Since I just posted 3 comments critical of Matt's analysis I should still say it is HUGELY better than the drivel one will typically find in the NYT/Bloomberg/WSJ or hear from even intelligent politicians. He obviously got a lot more out of his econ classes than most people did theirs.
I’ll spare you my own cost benefit analysis of Fed interest rate movements in the immediate future and go to:
“But let’s say it’s the middle of 2023, inflation is sitting at 3% and unemployment is at 4 or 4.5%. Is it worth raising unemployment by another point to get inflation down to 2%?”
Well, the question at that point would be, is it necessary or can we just wait and see if the rate setting trajectory up until that point might still bring it down to 2%.
I would argue that changing the target should not depend on conjunctural factors, although they might influence WHEN the change is made. Harking back to my earlier comment today about why we want any inflation AT ALL – shocks that require changes in relative prices when some prices cannot fall – it follows that the target for average inflation ought to depend on the average size and frequency of the expected shocks. Have shocks gotten larger? Was 2% optimal for the size of past shocks? I do not know, but THOSE are the questions I would want the Fed to answer for itself.
Hey Milan, I'm completely on board with the 3% inflation rate (no one thinks 3% average inflation is devastating and some more wiggle room in a recession is better than getting trapped at the 0 lower bound).
But I've got a question about the expectations part of inflation targeting every expert just seems to be asserting. This part seem non-scientific. Is there any social psychology research on impacts of adjusting inflation targets (or similar policy moves)? Or are the economists just going with their guts here? Maybe setting the inflation target to 3% when you're at 5% annualized inflation is actually quite bad! But maybe setting the inflation target to 3% when you've made it to 2.5% is fine? Genuinely unsure, but since you've clearly gone through the literature and talked to the right people, curious if there's anything on this.
Wage increases have not kept up with inflation. So, wasn't the inflationary stimulus a backhanded way of increasing labor demand by lowering wages?
In other words, to use a highly technical term I saw when browsing through my son's economics textbook, wages were "sticky" and it took inflation to "un-stick" real wages.
I'm a bit of a hawk just because inflation can wreak so much havoc with the economy. I strongly disagree with Sahm's quote as stated, but I am glad that at full employment more people are building skills and track records and hopefully moving up the ladder. The financial crisis in particular and the Covid crisis have really messed up a lot of people's careers, and a little bit of a hot job market will help make up for that.
Why isn’t a fiscal measure like a temporary special tax on the top quarter of income earners part of the toolkit? Too politically fraught? Or does it not target the best-off as well as I’m thinking it might?
My financial advisor says put off buying or repairing anything you can until the Congress manages to raise the debt ceiling. Markets will drop as the real deadline gets closer and who knows what will happen if the crazies prevail. So keep on hand as much cash as possible so you don’t have to dip into a depleted retirement fund. As this realization spreads, demand will go down. Meanwhile, I’m dropping my catalogs into the trash without reading them.
Milan - you write a real good take. This is as good as anything I've read on the current state of inflation. And I've read a fair amount. Congratulations and keep up the great work. For what it's worth my take is that there should be a soft landing, unless the Fed becomes needlessly sadistic. Among other things, there's this piece by Connor Sen in Bloomberg from 10 days ago:
https://www.bloomberg.com/opinion/articles/2023-01-09/rental-housing-is-suddenly-headed-toward-a-hard-landing
Anecdotally, the apartment building where my wife and I live while we're looking for a new house is now offering $1,000 bonuses for new renters. When we rented in July, there were only 4 vacancies out of 340 units. Quite the reversal. No one asked but I think by July-Sept core PCE will be in the threes YOY and the fed will be looking at rate decreases by year end. Anyway, your piece was a real pleasure to read. Best regards.
I’m more a dove than a hawk, but Claudia Sahm’s complete apathy toward the inflation rate shows the type of contempt for voters that leads to bad things down the line. We can try to convince people they should care about different things, but we can’t really choose what voters care about, and inflation is very unpopular (I’d argue the same point on entitlements to conservatives who have issues with them - it’s a democracy and voters like social security, deal with it).
I'm actively trying to hire a couple of technical/engineering writers, typically MS with work experience, and it's very rare for me to get writing sample submissions as good as this.
>Food $200
>Data $150
>Rent $800
>Candles $3,600
>Utility $150
>someone who is good at the economy please help me budget this. my family is dying
so I don't know if the conclusions are sound (really just not my area at all), but the writing is very good.
Nice headline/sub headline for this article, Milan.
Thanks for referencing the New Zealand target. 2% is totally arbitrary! There's nothing magical around it. The Fed could just as easily say, "we've looked at the data and 3% (or 4%) is a more appropriate target because it gives us wiggle room on the low end of interest rates." The Great Recession should have caused a change in thinking around this, but it doesn't look like it has.
It strikes me there is something really wrong with the CPI measure of rent if the lag is that large. Arguably it a major reason for the Feds policy mistakes - not recognizing inflation when it first started going up, and being too slow to react when it is going down.
"I highly doubt that a college freshman (even one as intelligent, charming, and humble as myself) has a better sense of what’s going on in the macroeconomy than the experts at the Fed or professional bond traders. "
Let's be real here - economic experts almost always get projections wrong. Economics is not a predictive science, as has been shown time and again, most recently with the vast majority of them believing in the "transitory" hypothesis. There is no reason to think that your calculus and arguments are any less likely to be accurate than theirs.
My own non-expert view is that the fed should hold off on further increases and see what happens with the ones it's already done, since interest rate increase have lagging effects.
Dude, I seriously didn't realize Matt hadn't written this until the comment about being in college which really confused me. Very good job Milan!
Starting at 1:00 is Milan in 15-20 years.
https://youtu.be/ApEr96H2jVU
Since I just posted 3 comments critical of Matt's analysis I should still say it is HUGELY better than the drivel one will typically find in the NYT/Bloomberg/WSJ or hear from even intelligent politicians. He obviously got a lot more out of his econ classes than most people did theirs.
I’ll spare you my own cost benefit analysis of Fed interest rate movements in the immediate future and go to:
“But let’s say it’s the middle of 2023, inflation is sitting at 3% and unemployment is at 4 or 4.5%. Is it worth raising unemployment by another point to get inflation down to 2%?”
Well, the question at that point would be, is it necessary or can we just wait and see if the rate setting trajectory up until that point might still bring it down to 2%.
I would argue that changing the target should not depend on conjunctural factors, although they might influence WHEN the change is made. Harking back to my earlier comment today about why we want any inflation AT ALL – shocks that require changes in relative prices when some prices cannot fall – it follows that the target for average inflation ought to depend on the average size and frequency of the expected shocks. Have shocks gotten larger? Was 2% optimal for the size of past shocks? I do not know, but THOSE are the questions I would want the Fed to answer for itself.
Hey Milan, I'm completely on board with the 3% inflation rate (no one thinks 3% average inflation is devastating and some more wiggle room in a recession is better than getting trapped at the 0 lower bound).
But I've got a question about the expectations part of inflation targeting every expert just seems to be asserting. This part seem non-scientific. Is there any social psychology research on impacts of adjusting inflation targets (or similar policy moves)? Or are the economists just going with their guts here? Maybe setting the inflation target to 3% when you're at 5% annualized inflation is actually quite bad! But maybe setting the inflation target to 3% when you've made it to 2.5% is fine? Genuinely unsure, but since you've clearly gone through the literature and talked to the right people, curious if there's anything on this.
Wage increases have not kept up with inflation. So, wasn't the inflationary stimulus a backhanded way of increasing labor demand by lowering wages?
In other words, to use a highly technical term I saw when browsing through my son's economics textbook, wages were "sticky" and it took inflation to "un-stick" real wages.
I'm a bit of a hawk just because inflation can wreak so much havoc with the economy. I strongly disagree with Sahm's quote as stated, but I am glad that at full employment more people are building skills and track records and hopefully moving up the ladder. The financial crisis in particular and the Covid crisis have really messed up a lot of people's careers, and a little bit of a hot job market will help make up for that.
Why isn’t a fiscal measure like a temporary special tax on the top quarter of income earners part of the toolkit? Too politically fraught? Or does it not target the best-off as well as I’m thinking it might?
My financial advisor says put off buying or repairing anything you can until the Congress manages to raise the debt ceiling. Markets will drop as the real deadline gets closer and who knows what will happen if the crazies prevail. So keep on hand as much cash as possible so you don’t have to dip into a depleted retirement fund. As this realization spreads, demand will go down. Meanwhile, I’m dropping my catalogs into the trash without reading them.