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Dylan vox roanoke va1/22/2024 I can’t tell you what’s in Fed chair Jerome Powell’s heart, despite my past entreaties to the Fed media department. So, why did so many forecasters, and I, get this so wrong? They got it right, or at least more right than I did. Economists like Larry Summers, Olivier Blanchard, and the team at the Committee for a Responsible Federal Budget were all warning about high inflation in early 2021. PIIE/Karen DynanĪt the same time, the error wasn’t inevitable. Predictions from this time in 2021 about the year’s inflation were far off the mark. “The models really led us astray,” Karen Dynan, a professor of economics at Harvard and former assistant secretary of the treasury for economic policy, told me, offering the below chart as further evidence. Put another way, the people you’d expect to have the surest handle on where inflation is going have admitted they got it wrong, too - and by a lot. Private forecasters surveyed in November said they expected 2.3 percent inflation by February, it was up to 3.1 percent. When I made my prediction, I cited the Federal Reserve’s policymakers, whose median forecast as of December 15, 2021, was for 2.7 percent inflation in 2022, per the core PCE measure (their favorite metric as well as mine).īut in March, the Fed updated its projection from 2.7 percent to 4.1 percent. A lot of people much better credentialed than me argued that inflation was going to cool down substantially in 2022. I responded that I stood by it, and if I was wrong, I would write a groveling follow-up piece. The US would be very lucky to keep inflation below 5 percent for the year at this point my prediction of 3 percent looks, three months later, ridiculous.Īt the time I wrote my July 2021 piece, “Don’t worry about inflation,” a prescient copy editor noted that this headline might look bad if I was wrong and inflation got increasingly worse. That’s my preferred metric, but data released on April 12 showed that the more widely publicized consumer price index grew by 8.5 percent compared to the year before, the highest rate in four decades. Well, in February, core inflation as measured by the personal consumption expenditures (PCE) index grew by 5.4 percent, and seems to still be heating up. This January 1, I predicted that average US inflation for the year would be below 3 percent. When fears arose last fall that rising inflation expectations - that is, people thinking inflation was going to be higher in the future - could in turn lead to more inflation now, I wrote a newsletter citing research that cast doubt on that theory. So I wrote a long piece last summer arguing that high inflation was unlikely in the 2020s. If there is, as most economists believe, some trade-off between inflation and unemployment, that means the Fed’s policies on inflation were unduly hawkish and kept many people out of work during the long recovery from the Great Recession. The Federal Reserve, which is tasked with managing the money supply to keep inflation steady and unemployment low, set a low inflation target of 2 percent a year, and kept falling short. In fact, our main inflation problem was that we had too little of it. I’d been covering economic policy since 2008, and in that whole time (in fact, in my whole lifetime!), the US had never had a problem with excess inflation. When prices began ticking up a little faster than normal early last year, I wasn’t overly concerned. Let’s get this out of the way first: I was wrong about inflation.
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