Inflation
Commentators across the ideological spectrum have argued that inequality justifies a more hawkish path for monetary policy. These arguments miss the fact that interest rate policy primarily slows consumer spending and consumer price inflation by slowing down the labor market first.
January is always a high-variance month for inflation readings and especially so for this January. We have been flagging the dynamics that were likely to grease the runway to elevated inflation prints in Q4 (which mostly materialized as described). We expect general strength in the January inflation print, primarily due
Conventional wisdom has held that rate hikes slow inflation long enough that straightforward accounts of how exactly one turns into the other are hard to find. Today, everyone needs to be on the same page about how exactly it is that Fed policy in particular can slow inflation.
It is key for commentators and policymakers to bear in mind that "transitory vs. persistent" is not the same debate as "narrow vs. broad-based."
If the Fed wants to stay true to the "maximum employment" component of its forward guidance, and the "broad and inclusive" nature of that goal, it is imperative that their interest rate policy actions reflect a full recovery on both of these measures.
The policy mistake worth worrying about isn’t the speed of taper per se; it's the signal that taper sends about the timing of liftoff in interest rate policy.
Critics are claiming the American Rescue Plan was too ambitious as fiscal stimulus. The data suggests today's inflation is due to the speed with which the economy is adding jobs, not the number of jobs added. As such, critics are really wishing for a slower recovery with a slower pace of job growth.
“Real wages” are often presented as a neutral measure of the ability of households to buy definite quantities of real goods after adjusting for changes in both prices and wages. In reality, "real wages" explain far less about household economic well-being than these stories confidently imply.
As the year ends, the final three inflation prints are more likely to be on the hotter side of what policymakers are comfortable with, especially due to developments in motor vehicle and air travel prices.
