Nowcasting is extremely difficult, and hazardous. But the “now” that I see today is the one I forecasted two to three quarters ago. Yes, the recovering US economy, like a driver who suddenly accelerates, is leaving inflationary skid marks on the asphalt. But, as I argued in May, these should not concern us, because “burning rubber to rejoin highway traffic is not the same thing as overheating the engine.”
The US is not currently in a situation where too much money is chasing too few goods, which would result in a surfeit of demand for labor and likely trigger an inflationary spiral. This is despite the fact that the ongoing COVID-19 pandemic and its associated disruptions continue to cause a substantial undersupply of labor.
Today, the US economy’s overall employment-to-population ratio is three percentage points below what we used to regard as its full-employment level. The ratios for women, African-Americans, and workers without a college degree are, respectively, five, 4.5, and four percentage points below this level…
The current uptick in US inflation is highly likely to be simply rubber on the road, resulting from the post-pandemic recovery. There is no sign that inflation expectations have become de-anchored. The labor market is still weak enough that workers are unable to demand substantial increases in real wages. Financial markets are blasé about the possibility of rising inflation. And a substantial fiscal contraction is already in train.
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