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The price of publicity

19 May 2021 By Richard Beales

Larry Summers is at it again. After suggesting earlier this year that U.S. President Joe Biden’s spending plans could overheat the economy, the Harvard University economist on Tuesday said the Federal Reserve is exhibiting “dangerous complacency,” including on inflation. Just last year, Summers was touting so-called secular stagnation, including the risk of falling prices and the need for central banks to boost inflation. The scaremongering from Summers and others is overdone.

The pandemic brought a rapid economic slowdown and then a sharp recovery. Meanwhile, there’s no doubt there are short-term price spikes. Companies reporting first-quarter earnings have talked about it, like home-improvement outfit Lowe’s on Wednesday where executives mentioned soaring commodity prices, especially lumber. And U.S. consumer prices rose a whopping 4.2% in the year to April, the highest annualized figure since 2008.

Fed Chair Jerome Powell reckons much of this – not to mention a perceived shortage of labor for some jobs – is transitory. He wants to get employment up to pre-pandemic levels before tightening monetary policy. Many big year-on-year price increases owe a lot to the parlous state of things 12 months ago. U.S. economic output tanked more than 30% in annualized terms in the second quarter last year, and inflation in the year to April 2020 was a negligible 0.3%.

One way to look past the distortions is to take a two-year view. For example, CPI over the 24 months to April, annualized, was 2.2%. That’s a non-scary number last seen, on the same basis, in 2019. It’s in line with the Fed’s 2% target, albeit for a different measure of inflation, and consistent with letting price increases overshoot the goal for a time after years of mostly undershooting.

The Fed’s rate-setters are projecting the inflation rate could rise as high as 2.6% this year. The top of their forecast range is 2.3% in the next couple of years, with 2% expected in the longer run. That’s sanguine, perhaps, but not necessarily complacent. Forward-looking five-year break-even inflation rates, calculated from government bond markets, have reached 2.7%. A measure that reflects expectations for years six to 10 from now is at 2.3%.

The steep rise in these measures from the March 2020 nadir merits attention, though it may simply reflect the unusual economic circumstances. Still, the levels for now are neither alarming nor out of line on, say, a 10-year historical view. In fact, by Summers’ secular-stagnation yardstick, they would be in the ballpark of what the central bank should be hoping for.


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