Jack Salmon writes on X:
CPI inflation continues to be stubbornly high regardless of how you attempt to measure it. You can look near term: 3-mo annualized = 4.6% Over a longer time frame (as the Fed has since 2020): 5-yr annualized = 4.2% You can exclude food, energy, cars, shelter = 3-mo anlzd = 4.4%
The fiscal side of inflation is a real thing. In his review of the book How Monetary Policy Got behind the Curve — and How to Get Back, AIER’s Thomas Hogan talks about some academics that looked at the question of what part of inflation was due to fiscal policy:
Lawrence Summers has consistently blamed fiscal policy for high inflation. He was a notable critic of the Biden administration’s spending programs, which he argued would drive up the price level. Cochrane, a proponent of the fiscal theory of the price level, explains with simple models how misinterpreting expectations could have misled Fed officials regarding the origins and persistence of inflation. He then turns to what he sees as its main cause: “the $5 trillion fiscal helicopter drop of 2020–21” (p.112). Tyler Goodspeed labels fiscal expansion as the “essential” causal component of inflation. Monetary policy, he says, could not have been the primary cause, although his short chapter does not thoroughly explore the monetary counterfactual. George Hall and Thomas Sargent assess the magnitude of Covid-era fiscal expansion relative to World Wars I and II, although Ellen McGrattan points out that recent spending mostly came in the form of transfer payments and subsidies.
More important now, I must warn again that the Fed alone won’t be able to cure our sustained inflation. Congress needs to fix the underlying fiscal problem. Not only is it not, the Biden administration also seems committed to its dual policies of pumping lots of money into the economy and constraining supply (think energy, trade, labor, investments, and more).
Add more than $1 trillion in interest payment this year, paid with more borrowing, and the many upcoming fiscal infliction points documented by our friends at EPIC, and you get a hint about why inflation is so hard to get rid of.
It doesn’t have to be this way, as John Cochrane explained a few months ago:
The good news is that inflation can end quickly, and without a bruising recession, when there is joint fiscal, monetary and economic reform. The inflation targets New Zealand, Israel, Canada and Sweden adopted in the early 1990s are good examples. They included deep fiscal and economic reforms. The sudden end of German and Austrian hyperinflations in the 1920s, when fiscal problems were resolved, are more dramatic examples. In the U.S., tight money in the early 1980s was quickly followed by tax, spending and regulatory reform. Higher economic growth produced large fiscal surpluses by the end of the 1990s. Without those reforms, the monetary tightening might have failed again. If those reforms had come sooner, disinflation might well have been economically painless.