EconExtra: Inflation--Transitory or Persistent?
EconExtra is a series of posts that go beyond the textbook, relating current events and recent developments in economics to content standards, and providing resource suggestions to help you incorporate the current events into your lessons.
Given that this week’s CPI came in at yet another 40-year high made me think it might be time to revisit the inflation issue. Jerome Powell just recently dropped the descriptor “transitory” from his inflation commentary, but many are still using the term, albeit with a slightly altered view of what "transitory" means. This post gathers opinion pieces by prominent economists and articles by journalists that have appeared in the last several weeks in the press. Each one gives a particular viewpoint as to what is driving inflation today, and whether or not they feel it is transitory.
The Cleveland Fed’s Inflation Center provides a Q&A on inflation that clearly describes the mainstream views on where we are at with inflation today and would be a great starting point. The Center also provides an interactive charting tool. The charting tool created the graph below. If you look at it closely, you will notice that the red line representing the median CPI does not move as drastically as the general measures (CPI and PCE), and it doesn’t really go up at all until months after the others. (To calculate the Median CPI, the Cleveland Fed analyzes the median price change of the goods and services published by the BLS. The median price change is the price change that's right in the middle of the long list of all of the price changes.) You can see that the measure of inflation you choose can definitely alter the perspective.
The Arguments and Evidence
While this New York Times (subscription may be required) article from August is an “opinion” piece, it is filled with historical prices of hundreds of individual goods and services through July, when we all thought we might be reaching a more stable situation in terms of Covid. The article was titled “179 reasons you probably don’t need to panic worry inflation.” These authors were in the “transitory” camp.
In this November interview with David Rosenberg (The Market), head of a research firm, Rosenberg predicted that inflation will subside in the new year (2022), but will persist as long as Covid continues to create supply (and demand) issues.
Michael Ashton, the “Inflation Guy” of Twitter fame, former derivatives trader and now podcast host offers a different view of inflation. Ashton’s podcast was created to educate generations of investors about dealing with inflation, as anyone under 40 has never experienced it!
Ashton is a monetarist—believing inflation is all a result of an increase in the money supply. His is not the mainstream view, but he believes recent experience may bring him more followers.
“With the Fed’s M2 money supply index having increased about 33% since February 2020, roughly five times faster than the economy, we may be about to find out if monetarism can make a comeback.” (Bloomberg)
Neil Irwin posted an Upshot (New York Times) article on December 31 dives into the economic lessons learned in 2021, of which inflation plays a large role. The comparisons made to previous recessions, especially the last one, are very illustrative. He describes 2021 as a year like no other. This citation gives you a good summary:
“It hasn’t been the most dramatic (that would be 2008 or 2020), and neither the best (2000 or 2019) nor the worst (2009). Rather, it has been a year in which economic dynamics that had seemed entrenched for decades came apart, or changed in fundamental ways. Workers attained the upper hand over employers; supply chains broke; inflation surged; and the economy rebuilt itself from its depressed pandemic levels with astounding speed.
In contrast to the last economic cycle, the government tried overheating the economy for once. For better and worse, it succeeded.”
Alan Blinder published an op-ed in the Wall Street Journal (subscription may be required) on in which he declares that he is on “team transitory,” and gave his reasons. This is a very accessible commentary.
2) Have students read the (five) articles mentioned. (The first NYT article could be skipped in the interest of time and used as background or supporting information for discussion.) If time is an issue, break into groups and assign an article to each group. (At a minimum, use the Michael Ashton article and one or two of the others.)
3) Have students demonstrate their understanding of the position taken in each article (persistent or transitory).
4) Have students declare their own position (after hearing all of the others if split into groups), and use information from either the articles themselves or the supporting information (Q&A, charts, or data from the first NYT article), to support their stance.
If you want to demonstrate the role of the money supply in all of this, you could start out with this St Louis Fed lesson.