The Inflation Reader
Understanding the most crucial macro issue today
When the pandemic caused governments around the world to shut down their economies in the first half of 2020, no one really knew how the economy would adjust. The focus was to ensure that firms remained solvent, and workers remained employment. Preventing a depression was the priority, and no one worried about inflation.
Coming from a developing country, with vivid childhood memories of stressed out parents dealing with empty shelves and price spikes, I wondered whether we were missing something. It seemed to me that the macroeconomic thinking in key western institutions could have been better informed by developing country experiences of natural disasters and political turmoils, whereby a real economy supply side shock disrupts production and there are relative price adjustments, but whether this adjustment turns into a generalised inflation crucially depends on what the policymakers do.
I am not smart enough to write up a fully mathed and quantified version of the above. Discussions with friends and colleagues at my then employer (fiscal authority in a medium-sized western economy) and the multilateral institution that currently pays me seemed to imply that the smart folks weren’t thinking along the above line in 2020.
Well, we are all worried about inflation now. I worried about it in the context of Bangladesh in January. I still think inflation will subside, but perhaps a bit later than previously thought. But I now think a US recession is likely. And I do think smart folks should look to the developing to better understand the macroeocnomics of supply chain disruptions.
Meanwhile, what should you read to better understand the most crucial macroeconomic issue today?
Larry Summers was the first major economist to seriously warn about inflation after the pandemic. His interview with Ezra Klein is a must read.
In addition, a few articles (none of which is academic / mathematical) that show how the thinking on inflation has evolved over the past few month are below.
Nouriel Roubini warns about multiple crises. The looming stagflationary debt crisis. 30 Jun 2021. And then he updates the warning. The Gathering Stagflationary Storm. 25 Apr 2022.
Brad DeLong says don’t worry about it. Why all the inflation worries?, 8 Nov 2021. Why isn’t there an inflation non-panic? 11 Nov 2021. America's Macroeconomic Outlook, 25 Mar 2022.
James K Galbraith says this is a microeconomic problem. The Choking of the Global Minotaur, 11 Nov 2022.
Wendy Edelberg explains why it’s hard to project from the current high inflation. What does current inflation tell us about the future?, 16 Nov 2021.
Chris Giles wonders when we should worry. Inflation: is now the time to worry?, 21 Nov 2021.
Raghuram G Rajan explains how the Fed found itself in trouble. Monetary and Inflationary Traps, 21 Nov 2022.
Stephen S Roach argues that the Fed’s policy framework needs revision. The Fed Must Think Creatively Again, 22 Nov 2022.
The Economist says stimulus contributed to inflation in the US. American inflation: global phenomenon or homegrown headache?, 25 Nov 2021.
Kaushik Basu says the cross-country experiences have been quite varies. The inflation conundrum. 25 Nov 2021.
Robin Harding sees Asia avoiding inflation. Asia is the global inflation exception. 26 Nov 2021.
Tobias Adrian and Gita Gopinath explains the central bankers’ difficult task. Addressing inflation pressures amid an enduring pandemic, 3 Dec 2021.
Rana Foroohar explains the difficulties with modelling inflation in the pandemic era. Why we should expect wobbling in global inflation dynamics. 2 Jan 2022.
Paul Krugman says the Fed made the right call. The economic case for goldilocks. 6 Jan 2022.
Dani Rodrik makes the case for being open to unorthodox measures. Inflation heresies. 11 Jan 2022.
Tim Hardord explains the difficulties with measuring inflation. Why real inflation is so hard to measure, 4 Feb 2022.
Adam Tooze says this isn’t another 1970s show. Why inflation and the cost-of-living crisis won’t take us back to the 1970s, 4 Feb 2022.
Joseph Stiglitz says there is no need for large interest-rate hikes. A balanced response to inflation. 7 Feb 2022.
Ryan Avent argues that the Fed should be patient. A tight squeeze. 12 Feb 2022.
Emi Nakamura explains what macroeconomists (don’t) know about inflation. Interview: Emi Nakamura, macroeconomist. 21 Feb 2022.
Martin Wolf urges Fed to act. Fed policy must adjust for inflation, 17 Nov 2022. He says Fed is too slow. The Fed is too late to remove the punchbowl. He also sees the return of monetarism. As inflation rises, the monetarist dog is having its day. 23 Feb 2022.
Jeffrey Frankel says the central bankers thought this time was like the last one. Fighting the last inflation war. 24 Feb 2022.
Mohamed A El-Erian argues that the Fed got it wrong. The Fed’s historic error. 28 Feb 2022.
Marco Del Negro, Aidan Gleich, Shlok Goyal, Alissa Johnson, and Andrea Tambalotti explain a model the Fed uses. Drivers of Inflation: The New York Fed DSGE Model’s Perspective, 1 Mar 2022.
Karen Dynan argues that rates should rise more than people might be expecting. What is needed to tame US inflation?, 10 Mar 2022.
James Hamilton explains the impact of high oil prices. Oil prices and inflation. 13 Mar 2022.
Olivier Blanchard explains why he worries. Why I worry about inflation, interest rates, and unemployment, 14 Mar 2022.
Kevin Varley and Stephen Stapczynski explore the impact on the developing world. Energy shock hitting poorer nations reliant on imprts hardest. 18 Mar 2022.
Scott Sumner blames bad monetary policy for inflation. 100% of excessive inflation is due to bad monetary policy. 30 Mar 2022.
The Economist isn’t hopeful about a soft landing. Can the Fed pull off an “immaculate disinflation”?, 2 Apr 2022.
John Cassidy explores Larry Summers’ warnings about inflation and its critiques. Is Larry Summers really right about inflation and Biden?, 8 Apr 2022.
Duncan Weldon argues that the central bankers had a tough choice. What were the central banks supposed to do?, 22 Apr 2022.
The Economist blames the Fed. Why the Federal Reserve has made a historic mistake on inflation, 23 April 2022.
The cartoon is from the early 1970s Australia, when the first left-wing government in a generation failed to respond to the stagflationary shocks.