A recent article by Joseph E. Stiglitz confirms that the earlier price increases were transitory and provides valuable insights into the nature of post-pandemic inflation. Stiglitz explains that the inflation was driven by supply disruptions and shifts in demand, particularly due to widespread disruptions to global supply chains and changes in patterns of demand. For example, the shortage of computer chips led to increased prices for automobiles, but once the supply issue was resolved, prices came down. Stiglitz emphasizes that disinflation, a decline in the rate of inflation, is what matters for central banks monitoring changes in prices. This aligns with Federal Reserve Chair Jerome Powell's view that the recent surge in U.S. productivity has contributed to declining inflationary pressure. The surge in productivity is driven by improvements in the number of people willing to work and improvements in how much each worker produces. This dynamic lowers effective labor costs even if wages are higher, allowing the economy to grow, add jobs, and raise wages without adding to inflation. The Federal Reserve kept its policy interest rate on hold despite strong economic growth, as rising productivity signals receding inflationary pressure. The possibility of a virtuous cycle is developing where jobs remain plentiful, wages grow, and the economy continues to expand with steady disinflation. However, if real growth continues and enough inflation returns, the Fed may need to tighten monetary policy. The surge in productivity is reminiscent of the mid-1990s when rising productivity allowed the economy to grow with less inflation. The spread of web-based technologies has contributed to tempered productivity numbers in recent years. The October employment report will provide updated estimates of the labor force, a critical piece of the puzzle. The surge in productivity and the potential for sustained economic growth without inflationary pressures offer a wider runway for the Fed's desired soft landing. The combination of Stiglitz's insights on transitory inflation and Powell's perspective on productivity-driven disinflation highlights the complex dynamics at play in the U.S. economy. It suggests that the recent surge in productivity, coupled with supply disruptions and shifts in demand, has contributed to the transitory nature of inflation. This aligns with the Biden administration's economic agenda, which has focused on boosting productivity through investments in clean energy and infrastructure. The clean-energy boom and low inflation rates are seen as positive outcomes of these initiatives. The Inflation Reduction Act and other government initiatives have driven private sector investments in green energy and manufacturing facilities, boosting the supply side of the economy. The bipartisan infrastructure law, the Chips and Science Act, and the clean-energy provisions of the Inflation Reduction Act have all played a role in supporting economic growth and employment gains in various sectors. The administration's efforts to maintain the manufacturing boom and employment gains through worker training and investment further contribute to the potential for sustained economic growth without inflationary pressures. With the right investments and training for American workers, "Bidenomics" may achieve its goal of higher output, higher wages, and declining inflation. The article by Joseph E. Stiglitz provides a comprehensive analysis of the transitory nature of post-pandemic inflation and the factors contributing to disinflation. Stiglitz's insights align with Federal Reserve Chair Jerome Powell's view on productivity-driven disinflation and shed light on the complex dynamics at play in the U.S. economy. The Biden administration's economic agenda, focused on boosting productivity and supporting clean energy and infrastructure investments, further supports the potential for sustained economic growth without inflationary pressures. The combination of these factors offers a wider runway for the Fed's desired soft landing and the achievement of higher output, higher wages, and declining inflation.
However, an article from the Brookings Institution challenges the notion of transitory inflation. The article titled 'The lagged effects of COVID-19 supply chain disruptions on inflation' argues that the COVID-19 inflation shock was largely supply-driven due to unprecedented supply chain disruptions. The authors, Peter R. Orszag and William E. Murdock III, highlight that firms' margins are still normalizing, indicating long-lasting effects of COVID-19 disruptions. They suggest that inflation is expected to continue falling due to lagged disinflation effects from supply normalization. The article also mentions that delivery times in the US were at or above levels seen after the Fukushima nuclear disaster in Japan, indicating the severity of supply chain disruptions. The authors emphasize that disinflation from supply chain normalization operates with longer lags than most appreciate, and margins in the US are only just starting to normalize, indicating substantial lagged inflation effects from supply chain normalization. The future blog post by Robin Brooks, Peter R. Orszag, and William E. Murdock III will quantify the continued force of disinflation from supply chain normalization. This perspective from the Brookings Institution adds nuance to the discussion on post-pandemic inflation, suggesting that the effects of supply chain disruptions may have longer-lasting impacts on inflation than previously thought. [60da5a5f]