I'm totally open to the idea that "things are different this time" but an inflationary spike after the deflationary collapse of COVID isn't surprising at all. I definitely see some prices increasing but most of them are the same or less. It's really difficult to untangle what is inflation and what is just a lingering supply shock from everything being shut down. I just wish the inflation people would have more humility in their predictions.
Had you described the actual pandemic to some folks before it happened I would think they would have predicted things would be way worse than they are.
I'm kinda surprised things are the way they are. I would have expected serious economic disaster type stuff.
Which is..exactly what they are saying.
If we go back two years (because 2020 was certainly an abnormal year) and take a look at the trends, things don't seem so bad.
ps. Fed changed their inflation targeting. The target is still 2% core PCE but now it's average targeting. They will allow inflation go above 2% and start to act only after the average inflation reaches 2% (over some unspecified timeline).
I believe Fed will have real fight to keep the inflation not going below 2% for the reasons Hartnett probably knows but don't wan to say.
Notably, Krugman is not predicting low inflation this time around.
If this is still the same event then all those people still could be right.
Most folks I think read these as predictions of pretty soon to come events... not "never mind we meant over the next 20 ... 50 ... 100 years".
And at that point that's not 'right' IMO.
National debt is only one piece of that. Banks could also raise (private loan) interest rates, or be forced to maintain more reserves, leading to fewer loans.
Like "Well I'd like to see moderate inflation but control the stock market, oh and ..."
Usually I think governments just flip a lever in hopes of getting one thing done, maybe, hopefully.
Keynsians do not like deflation because people save money during a deflationary period, and saving money reduces aggregate demand. They will tell you that deflation is equivalent to a recession for that reason, and point to the great depression as an example.
I would point out that after the deflationary period of the great depression, the US became a much more equitable society, and was followed by three decades of healthy growth (until bretton woods ended...).
Money has a natural ebb-and-flow. When people have no savings, they are less willing to part with money. The price of money (the interest rate of borrowing) increases. When people have lots of savings, they are more willing to lend it out. The price of money decreases.
These ebbs-and-flows were small when commodities stood for money. Fiat currency allows banks to practice price controls with money, so the ebbs-and-flows are more extreme, and last for longer periods of time.
Deflation rewards those with savings, because their savings can purchase more over time. Inflation rewards borrowing, because borrowers can repay a loan with money that is worth less. Understand, then, that the US government is a debtor. A deflationary period would be intolerable to them, because they would not be able to make payments on their debt. Expect inflation to continue apace, regardless of its effect on normal people.
By my accounts inflation has actually been double or triple the fed’s 2% target for the better part of a decade.
why? what is special about 4%?
If you want to sort of gross rank investments in terms of returns, I was taught in my econ classes, you first look at government bonds as the lowest risk, and expect to make less than 0.5% return after inflation. Next you look at the company bond market where you can expect to 0.5%-1.5% but take on considerably more risk. Then you look at company stock markets where you can expect to make 3-4% after inflation but at the cost of even more risk. After that you start getting into things like junk territory, where you can make a killing, but more likely you'll lose your investment.
These numbers may not hold in any given year, and certainly don't apply to markets that are able to sustain greater than 3% GDP growth for multiple decades in a row (usually because they are able to play "catch up" technologically). But once you're at the top of the S curve, competition sort of drives down the returns you can realistically get in investment markets.