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Schrödinger’s inflation

Summary:
There’s a lot of debate about whether the current burst of inflation is transitory or permanent. I worry, however, that many people misinterpret the question, thinking it’s about the nature of the inflation itself. Sort of like asking their friend whether an animal that they saw walking in the distance is a dog or a coyote.But the transitory inflation question is not like that at all. The question is not whether this current bout of inflation is transitory or permanent, the question is whether the inflation surge will be transitory or permanent. No one asks whether that animal walking in the distance will be a dog or a coyote—they assume that that reality has already been established.NGDP growth has been running at a bit below 4% over the past couple of years. That’s

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There’s a lot of debate about whether the current burst of inflation is transitory or permanent. I worry, however, that many people misinterpret the question, thinking it’s about the nature of the inflation itself. Sort of like asking their friend whether an animal that they saw walking in the distance is a dog or a coyote.

But the transitory inflation question is not like that at all. The question is not whether this current bout of inflation is transitory or permanent, the question is whether the inflation surge will be transitory or permanent. No one asks whether that animal walking in the distance will be a dog or a coyote—they assume that that reality has already been established.

NGDP growth has been running at a bit below 4% over the past couple of years. That’s about right. If NGDP growth runs at about 4% over the next 3 or 4 years (as it should) then the inflation will be transitory. If it runs at 7% or 8% over the next few years then the inflation will be permanent, or at least relatively persistent. It’s that simple. (During 1971-81, NGDP growth averaged 11%. God help us if that occurs again.)

It is the Fed that will determine the rate of NGDP growth over the next few years, not housing shortages or labor shortages or supply chain disruptions, etc. The Fed will decide whether the inflation is transitory or permanent.

The current surge in inflation is like Schrödinger’s cat; it’s neither transitory or permanent until the FOMC meets and chooses a policy path for NGDP over the next 3 or 4 years. Let’s hope they choose wisely.

PS. Of course I’m a “many worlds” guy, so I’m going to claim that my prediction (and what is my prediction?) is correct in at least one universe. 🙂


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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