Stagflation or Soft Landing? Krugman

So, about that debate: In early 2021 some economists, most famously Larry Summers, warned that the Biden administration’s big spending package would be highly inflationary. Others — myself included, unfortunately — downplayed that risk. 

High inflation had happened, but how hard would it be to get it down again? Again, economists took sides.

One side — call it Team Stagflation — argued that it would take years of pain and high unemployment to restore price stability, which is what happened after the high inflation of the 1970s.

The other side, call it Team Soft Landing, argued that the situation was very different this time. The conventional view among economists is that disinflation was so hard in the 1980s because high inflation had become entrenched in expectations

The inflation surge may not be completely behind us, but there’s good reason to believe that we can restore price stability without huge economic pain.

One disturbing aspect of recent economic debate has been the consistency of many economists’ positions despite rapid changes in the economic situation: Optimists are always optimists, pessimists always pessimists. 

I spent this morning trying not to drink too much coffee, waiting for the release of the Employment Cost Index, which tries to correct for changes in the job mix and is probably the best measure we have of wage pressures. And it was good.

It shows overall wages and salaries rising at a 4 percent rate, only a bit higher than they were prepandemic.

No doubt this debate will continue, as economic debates tend to. But I think we’re approaching the point at which Team Stagflation will have to do what Team Transitory did a while back: admit that they got it wrong, and try to figure out why.

Paul Krugman 31 January 2023

https://www.nytimes.com/2023/01/31/opinion/stagflation-or-soft-landing-it-depends-who-you-ask.html

For Markets, Good News Is Good News Again

The bad news is, there are plenty of reasons to think it may not last

But the shift in the stock-bond link requires a belief that inflation has been vanquished. The market is well ahead of the economic evidence, and it’s easy to see how the new regime could be upset.

Unemployment remains at 50-year lows, there are still 4 million more jobs on offer than there are unemployed workers, and while wages are rising more slowly than they were, they’re still rising far too fast for Fed comfort.  

It seems more plausible that inflation fears will return in the not-too-distant future, and stocks and bond yields will start moving in opposite directions again.

James Mackintosh WSJ 31 January 2023

https://www.wsj.com/articles/for-markets-good-news-is-good-news-again-11675182809