Paul Krugman

Paul Krugman @paulkrugman

The evidence so far doesn't point to the latter story, although it sure sounded as if that was what Larry Summers was saying. But I understand that the Fed wants to make sure that we don't get to that point 8/ — PolitiTweet.org

Paul Krugman @paulkrugman

The point is that it matters a lot whether we're just overheated, needing a cooling off of demand and a modest rise in unemployment, or we need years of punishment until morale improves — sorry, until expected inflation comes down 7/ — PolitiTweet.org

Paul Krugman @paulkrugman

So far we don't seem to be in that situation. Much hyperventilating about a rise in the Michigan number for long-term inflation expectations, but that was one month's number — not matched by NY Fed survey, which also shows modest wage expectations 6/ https://t.co/Gi2JTVOCTT — PolitiTweet.org

Paul Krugman @paulkrugman

Notice that this is actually a wage-wage spiral, not a wage-price spiral. Anyway, the point is that once you're there you need to break the spiral somehow to get inflation down — say, with a massive multi-year Volcker-type bulge in unemployment 5/ — PolitiTweet.org

Paul Krugman @paulkrugman

It's a real slog to read, but Phelps argued that with staggered wage and price setting, persistent inflation would become self-perpetuating. Here's the key passage 4/ https://t.co/PPQrZ0uop9 — PolitiTweet.org

Paul Krugman @paulkrugman

The ur-reference here is the 1968 Phelps paper on inflation — actually a better model although much worse writing than the famous Milton Friedman analysis — about how expectations could get "built in" 3/ https://t.co/Im9M7k3gQm — PolitiTweet.org

Paul Krugman @paulkrugman

The real concern is self-fulfilling inflation — inflation not driven by demand exceeding supply, but simply everyone raising wages and prices because they expect others to be raising wages and prices 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

OK, I thought everyone in the biz knew this, but anyway a real response. Part of the problem is that "wage-price spiral" is a really bad term for what we're really worried about 1/ — PolitiTweet.org

Paul Krugman @paulkrugman

Lots of interesting parallels but also contrasts between the dotcom bubble and crypto. Will write more about all that soon. 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

As of this morning BTC is experiencing a modest rally. Probably just a dead crypto bounce. But anyway I thought some history might be relevant 1/ https://t.co/g3ZcSVhuh7 — PolitiTweet.org

Paul Krugman @paulkrugman

Actually this is pretty impressive too https://t.co/UVq1o1GlSZ — PolitiTweet.org

Paul Krugman @paulkrugman

OK, folks, this is getting impressive https://t.co/lkKWqKcVcm — PolitiTweet.org

Paul Krugman @paulkrugman

What all this suggests to me is that the Fed may now be overreacting, with harsh tightening in the face of a not-so-severe underlying problem. 7/ — PolitiTweet.org

Paul Krugman @paulkrugman

Beyond the politics, what will it take to get underlying inflation down? Economy needs to cool off. But how much? Recent events suggest the Phillips curve is relatively steep when the economy is running hot, but shouldn't that be true on the downside as well as the upside? 6/ — PolitiTweet.org

Paul Krugman @paulkrugman

Republicans go on and on about $2 gas under Trump — but that was at the bottom of a global slump caused by Covid. And of course Rs have no ideas about how to bring prices down 5/ — PolitiTweet.org

Paul Krugman @paulkrugman

But the politics are all about precisely the stuff monetary/fiscal didn't do, above all gasoline prices — which are, by the way, not all that high in real terms by historical standards 4/ https://t.co/Pr2mvjsdXV — PolitiTweet.org

Paul Krugman @paulkrugman

So underlying inflation probably <4%, vs 2% target; headline is 7. So a real excess of inflation, but most — not all — is supply chains, Putin, etc that are, among other things, not related to US monetary or fiscal policy 3/ — PolitiTweet.org

Paul Krugman @paulkrugman

A quick and dirty chart comparing headline with three measures of underlying. Wages is rate of wage growth minus 1 percent for productivity; others are traditional core and trimmed mean 2/ https://t.co/RnEZ7Y1uCb — PolitiTweet.org

Paul Krugman @paulkrugman

A few more thoughts on the current inflation environment — partly to clarify things for myself. Right now we have ~7% inflation (last three months on PCE deflator, annualized); underlying inflation much lower 1/ — PolitiTweet.org

Paul Krugman @paulkrugman

So it wouldn't be surprising if a few months from now careful analysis will say that underlying inflation is still too high, but consumers are seeing dropping prices for salient goods. If so, what are the political implications? 6/ — PolitiTweet.org

Paul Krugman @paulkrugman

We keep hearing about retailers who overreacted to supply chain problems, and are about to cut prices to shed excess inventory. Energy prices may fall despite Russia/Ukraine because of global slowing etc. 5/ — PolitiTweet.org

Paul Krugman @paulkrugman

It's unfair — but it's also possible that the unfairness may soon be cutting the other way. Underlying inflation will probably be slow to respond to Fed tightening; other prices may fall much faster, for a variety of reasons 4/ — PolitiTweet.org

Paul Krugman @paulkrugman

And here's the thing: the political backlash is mostly about the stuff that can't be blamed on policy, especially gasoline. Republicans would still be going on about $5 gas even if there had never been a fiscal stimulus 3/ — PolitiTweet.org

Paul Krugman @paulkrugman

First, the economics: underlying inflation has probably risen from 2 percent to around 4 percent, which can be attributed to loose fiscal/monetary policy. But headline inflation is 7/8 percent — so most inflation doesn't reflect stuff US policymakers control 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

A few thoughts on the political economy of inflation, which are deeply unfair — and also may not play out quite how everyone thinks 1/ — PolitiTweet.org

Paul Krugman @paulkrugman

Strong Ted Cruz vibes — PolitiTweet.org

Paul Krugman @paulkrugman

Obvious risks in both directions: inflation expectations continue to rise, or the monetary tightening proves to be overkill and sends us into outright recession. But at least the Fed is now telling a coherent story 6/ — PolitiTweet.org

Paul Krugman @paulkrugman

Not a recession, exactly, but a "growth recession" in which below-potential growth causes at least some increase in unemployment. Previous Fed projections didn't make room for that, which was hard to justify. Now they do 5/ https://t.co/eV0wjdugLy — PolitiTweet.org

Paul Krugman @paulkrugman

What the Fed is now projecting is pretty much what I called the Goldilocks scenario, which looks like this 4/ https://t.co/uGrCmE7NCv — PolitiTweet.org

Paul Krugman @paulkrugman

I wrote about this two months ago. The US economy looks overheated, so it needs to grow more slowly than potential to cool off 3/ https://t.co/fVLc5Swa8q — PolitiTweet.org