Wonking Out: The Inflation Debate Is Cooling May 26, 2023 - P. Krugman
On Tuesday, the Brookings Institution held a special symposium on inflation, which I unfortunately couldn’t attend. But I read the two papers presented and some of the subsequent commentary, and it seems to me that something weird is happening: growing agreement among many (although not all) economists about both the causes of and, more important, the future prospects for inflation.
And the seemingly emergent consensus is cautiously optimistic.
I won’t talk here about the paper by Don Kohn and Gauti Eggertsson, although I think it may point the way toward a deeper understanding of some key issues. Instead, let’s talk about the paper by two major (and deeply respected) heavyweights: Olivier Blanchard, the former chief economist of the International Monetary Fund, and Ben Bernanke, the former master of the world — I mean, the former chair of the Federal Reserve.
B. & B. focus a lot on the big debate in early 2021 over whether the big Biden spending package would be highly inflationary. Obviously, the pessimists — Blanchard among them — who predicted large inflation were right, while the optimists who minimized the risks — myself unfortunately included — were wrong. But the paper argues that the pessimists were largely right for the wrong reasons. They expected that inflation would arrive via a hugely overheated labor market, but that’s mostly not what happened:
Here’s the money graph
Bernanke and Blanchard (2023)
In this graph, “v/u” indicates their estimate of the effect of overheated labor markets on inflation; it refers to the ratio of job vacancies to unemployed workers seeking jobs, their preferred measure of labor market tightness. Their estimates say that overheated labor markets have played some role in recent inflation, but not a central one.
Continued at NYT gifted link to article