Category Archives: inflation

Six Explanations for Misperceptions Regarding the Strong Economy

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February 25, 2024 — By now, quite a variety of explanations have been offered for the puzzle that the unusually good state of the US economy has not been reflected in public opinion surveys, and especially not in polls regarding President Joe Biden’s bid for re-election in November.  At least six hypotheses have been put forward regarding the performance-perception gap.

Perception biases

  1. Some charge that the official statistics must be wrong, out-of-touch, failing to capture the true state of the economy. This hypothesis is itself wrong.  While any given number is subject to measurement error, the evidence from a wide variety of statistics, most of them gathered separately, has been overwhelming.  They tell a very positive story, whether one looks at the measures of economic growth (GDP), strength in the labor market (jobs created or unemployment), or inflation (either CPI or PCE, and either headline or core).

Media commentary over the last two years has emphasized that the economy and job market have been slowing down.  They usually fail to note that, although this is true relative to the breakneck growth of the year that immediately followed the 2020  pandemic shutdown, the current rates of expansion of GDP and employment are above their post-2000 averages. read more

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Does the Fed Deserve Credit for the Disinflation?

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November 19, 2023 —  The Bureau of Labor Statistics on November 14, remarkably, announced that the US CPI had been unchanged in October (whether seasonally adjusted or not).  That is, the level of the CPI was unchanged, not the inflation rate, which was zero.  Of course, single-month numbers are too volatile to draw much of a conclusion.  Not every month will see the price of gasoline plunge by 5.0 %, as it did from September to October.

More informatively, the headline CPI inflation rate over the last 12 months was 3.2 %, far down from 6.5 % in 2022.  At the risk of tempting fate, one might say that the inflation battle is being won. read more

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Isn’t this what a soft landing would look like?

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July 19, 2023 — A skydiver jumps out of an airplane, apparently without a working parachute. On the way down, a passing hang-glider calls out to ask how he is doing.  The plummeting man shouts back “Okay, so far!”

For many, the US economy resembles the skydiver.  But they are probably wrong.

  1. Expectations of a hard landing

Many think a hard landing became inevitable when the Fed in March 2022 began a series of interest rate hikes, which totals 5.0 percentage points so far and is expected to continue. Many economists, as well as the public, have been confidently predicting a recession for over a year now, or even saying that it has already begun.  In June 2022, 57% of respondents told pollsters that they believed the US was already in recession, versus only 21% who did not.  An inverted yield curve in bond markets suggests that the financial sector, too, has been expecting a downturn.  The word “recession” appeared far more often in public media during the last year than is usual even in the midst of a true recession. read more

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