Orderly disinflation?
As US inflation gradually eases, the claim that today’s inflationary pressures are the result of a temporary supply shock has re-emerged.
While this thesis may be comforting, it could also encourage dangerous complacency, making an already serious problem much harder to solve.
While a few economists have never given up on the transitory inflation thesis, the vast majority already realized last year that it was a regrettable analytical and policy error. That makes the current re-emergence of this narrative even more perplexing.
Looking ahead to the rest of the year and early 2024, three possibilities stand out for me.
The first is orderly disinflation, In this scenario, inflation continues to come down steadily toward the Fed’s 2% target without damaging US economic growth and jobs.
The second scenario is one in which inflation becomes sticky. The inflation rate continues to decrease but then gets stuck at 3-4%. This would force the Fed to choose between crushing the economy to get inflation down to its 2% target, adjusting the target rate to make it more consistent with changing supply conditions, or waiting to see whether the US can live with stable 3-4% inflation.
Lastly, there is the possibility of prices head back up late this year and into 2024
Simplistic economic narratives is also the case with those who are predicting with a high degree of confidence a US recession (I am not in that camp), only to dismiss it as “short and shallow” in order to regain their economic comfort zone.
Mohamed A. El-Erian Project Syndicate 9 February 2023
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