Macroeconomists are enamored with the idea that observing financial markets can reveal the mysteries of the universe. They look to the differences between the interest rates paid on ordinary
Through 2021, the one-year spread never exceeded 2.7% — whereas in 2022, inflation turned out to be about 8% and closer to what surveys of consumers predicted.
We would have been better off had
Going forward, several pressure points may still prove troublesome.
Gasoline prices have been falling because the Biden administration has drawn down the Strategic Petroleum Reserve. Demand in
We have good reason to believe that current gasoline prices are artificially depressed.
The demand for exported natural gas in
Grain exports from
The labor market remains tight. Workers jettisoned by tech giants such as Meta and Twitter are quickly finding new positions elsewhere in the tech sector and in the finance, health care and retail industries.
Job openings exceed job-seekers by about 70%. Small businesses continue to hire, and the labor market is nowhere close to balance. Wages are rising about 6% a year, while productivity growth will likely remain pinned at about 1%. That’s inconsistent with 2% inflation.
The shift to green energy will push up the cost of electricity and automobiles. The grid is terribly overtaxed, and utilities lack good alternatives to natural gas when cold weather slows windmills and storms dampen solar generation.
From 2013 to 2021, the cost of lithium-ion battery packs fell by about 80%, but now that trend is reversing. Engineering improvements are getting tougher to accomplish, and tight material supplies abound.
Carmakers plan to unveil a host of new electric vehicles in the coming months, but those will be expensive. Chip shortages will continue, and car prices will fall only to the extent the economy slows, and people can’t afford to buy.
Rents on new apartment leases are falling because new household formation has dropped. That will put downward pressure on the housing component of the CPI later this year, especially as those affect imputed rent on owner-occupied dwellings. Rents, however, will rise as the economy strengthens in 2024 and more young people establish residences.
In his more recent ruminations,
He would do well to keep his word, keep pushing up interest rates, even if more gradually, and then keep those elevated until inflation is at or below 2% for at least six months.
That would give us a recession. But harsh memories of the 1970s, when the Fed did not stay the course, suggest that a period of elevated unemployment is a price we must pay for profligate spending and money printing.