Lots of number-crunching out there, but this was another very good inflation report. The debate over whether disinflation requires a large bulge in unemployment is essentially over. No, it doesn't. But there's still a debate about how we did this, which matters 1/
One story is that disinflation reflects economic normalization — recombobulation after the disruptions of the pandemic 2/
The other is that we've been sliding down a highly nonlinear Phillips curve, which is nearly vertical in a tight labor market 3/
Why this matters: the economy is looking very strong. Atlanta GDPnow at 4.1%! If the Phillips curve is very steep, this could mean reaccelerating inflation. If we're mostly seeing an end to pandemic disruptions, that risk is lower. 4/
Not the risks we thought we'd be facing! But we'll see 5/
Oh, and what Mike says 6/


なぜこの議論が重要かと言うと、経済が非常に強いように見えるからだ。アトランタ連銀のGDPNowは4.1%だ! もしフィリップス曲線の傾きが非常に大きいとすれば、これはインフレの再加速を意味しかねない。目にしているのがコロナ禍の混乱の終わりが大部分であれば、リスクは低くなる。
こうしたリスクに直面すると我々は予期していなかった! どうなるかはいずれ分かる。



So many measures of "underlying" inflation. But the Atlanta Fed's sticky price inflation comes closest to the theoretical concept behind inflation inertia. And it's very much sounding the all-clear


There's a lot of fairly ill-tempered debate among economists about news that should make everyone happy — disinflation without recession. My thought: we should apply Occam's extended razor. When in doubt, go for the simpler story, and rely on standard models 1/
Most econ textbooks offer some version of an aggregate demand-aggregate supply framework that looks like this 2/
For much of 2022 and some way into 2023 many economists were arguing that reducing inflation would require a big reduction in aggregate demand (via Fed hikes) that would lead to large job losses 3/
But what we actually got was a lot of disinflation, even in measures that tried to extract "underlying" inflation excluding volatile components ... 4/
... with the employment situation improving rather than worsening 5/
The simplest explanation consistent with the standard model — Occam's extended razor — was and is a rightward shift in aggregate supply 6/
Where might such a shift come from? The obvious answer is the end of Long Transitory, ie recombobulation — the economy sorting out lingering pandemic-related disruptions 7/
We don't know for sure that this is true; when do we ever know that anything in economics is true? But alternative explanations, especially claims that the Fed somehow did this with its mystical power of credibility, feel like attempts to explain away a big forecasting miss 8/
PS: agree that rate hikes should have reduced demand. The odd thing is that there's not much sign of that happening. What's true is that absent the rate hikes the economy might be running considerably hotter, and inflation higher 9/






そうしたシフトはどのようにして生じたのか? 明白な回答は長期の一時的な要因の終わり、即ち混乱収拾、というものだ。長引いていたコロナ禍関連の混乱を経済が解消した、というわけだ。
それが本当かどうかは確実には分からない――経済学で確実に本当だと分かった試しなどありはしないのではないか? しかし別の説明、特にFRBが信認という神秘的な力でこれをともかくも達成した、という主張は、予測の大きな失敗を上手く言い逃れする試みのように見える。

(Adam Ozimekのツイート)


Given the current inflation debate, I'd like to repost a thread from 4 months ago. I got dunked on at the time for suggesting that embedded inflation was only ~3%, but I stand by the logic, and the number looks plausible now, doesn't it? 1/
Fwiw, here's what the number — the average of past and expected future unit cost increases from the Atlanta Fed business survey — looks like now 2/
The broader point is that even at the peak of recent inflation the US economy looked nothing like the economy at the start of the Volcker disinflation, in which a wage-price spiral was deeply embedded in the economy, requiring huge unemployment to get inflation down 3/
Everybody now mocking the focus on consumer inflation expectations, which are indeed mostly just a response to the recent past and say little about underlying inflation. But I still think the level of long-run expectations tells you something about how entrenched inflation is 4/
And 2022 looked nothing like 1980 5/
Which I told you at the time. I was actually shocked to see prominent economists invoking the 80s disinflation as a model for the future; that was just an obviously wrong call given textbook macro 6/
I do think that some in the profession suffer from the temptation to play Isaiah, warning that we are doomed by our sins. And of course sometimes we are. But not this time 7/