Why did anyone ever think otherwise?
Krugman on the dynamite economic news today:
The U.S. economy is still growing fast, surpassing almost everyone’s expectations. Inflation is right at the Fed’s target. Let me explain why this is bad for President Biden.
OK, actually, no. Biden couldn’t have asked for better numbers.
Politics aside, these numbers help us make sense of the inflation that dogged America for a couple of years but plunged in 2023.
Here’s a wonkish chart, comparing the Fed’s preferred measure of inflation, the core personal consumption expenditures deflator (hey, don’t blame me), with a measure of labor market slack — the difference between the unemployment rate and the Congressional Budget Office estimate of normal, or “noncyclical,” unemployment. As you can see, before Covid there was a weak and noisy but still real relationship between the two: more slack, lower inflation.
Then inflation really took off. Many Biden critics, including some Democrats, blamed the big spending of Biden’s first year. But there was always a puzzle: Deficit spending is supposed to cause inflation by causing economic overheating, yet this should have been reflected in ultra-low unemployment, which didn’t happen. What happened instead was a period in which inflation was much higher than you would have expected, given unemployment.
But here’s the thing: At this point, we’re right back on the historical relationship.
The obvious story here is that we went through an episode of high inflation because of lingering but ultimately transitory supply disruptions caused by Covid, and that we’re back on track because the economy finally adjusted. Indeed, it takes real intellectual gymnastics not to tell that story.
So on inflation, it wasn’t Biden, it was the virus. And it’s over.
Of course it was. When you stop the global economy cold there is going to be a massive reaction. It’s wasn’t structural. I never understood why that wasn’t the default explanation.
Oh, and by the way, the media is finally starting to shift into reality: