There is no reason to worry – yet

The Fed announced the CPI for May:

0.6% is still at a fast pace. But I don’t think we should worry. The rates announced so far match Claudia Sahm’s predictions:

If we look at the PCE index, inflation has started to made-up its dip in 2020, but this does not necessarily imply that tightening is needed(say within 1-2 months). By the end of this year, inflation may fall as base effects, and supply bottlenecks may work in reverse. In this case, tightening will cause inflation to fall below the average. For example:

What I understand from the Fed’s statements is that they do not only want to hit 2% inflation on average, but that they want a sustainable average of 2% inflation. For this reason, even if inflation reaches an average of 2% in (say)June, monetary policy does not need to be tightened for the rest of the year. Base effects and supply bottlenecks will eventually reduce inflation towards the end of the year, which will be consistent with the 2% inflation target for 2020-2021.

I think Sahm’s projection better describes the Fed’s framework. However, it should be said that the Fed should be more clear in defining AIT. Many people understood AIT not as a sustainable average inflation target of 2%, but as hitting 2% on average. There is no reason to worry, many businesses are still recovering – we are not yet at the level to make up. But we’re getting closer.

We should always be cautious about inflation, but we should also look at other variables. What I see is that the average %2 inflation will be achieved at the end of the year. If we tighten it now, it will mean slower growth and more unemployment. Not yet.

P.S: NGDP data suggests we still have to go. NGDPLT would be a more efficient and understandable framework than AIT.

P.P.S: Employment data released last week:

Tyler Cowen quoted Betsey Stevenson last week:

The problem is that old jobs are long gone for the vast majority of those who remain unemployed.

I think this may be true. Workers were suddenly leaving their jobs at record rates:

Scott Sumner looks at employment rates by age groups here, and it’s pretty interesting. Read the whole thing.

Maybe the old jobs are really gone. In the last two years, especially the shopping sector has undergone many changes, we will see if this will change in the post-covid period. But a significant part of the old work does not seem to be coming back.

P.P.P.S: Tom Spencer has a Substack post on inflation alerts in the UK. Similar to the US, there is no reason to worry:

As we exit lockdown and reopen the economy we must not make the same mistake. The Bank of England should and does expect a slightly higher rate of inflation during our recovery. Stable forecasted inflation tells us that individuals and businesses alike have confidence in the economy and they’re willing to spend. This is something we should embrace and celebrate – it shows that people have faith in Britain. Those economists fearing a return to 1970s style stagflation must not be allowed to stop this recovery from happening and must embrace a slightly higher rate of inflation in the short run.

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