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Krugman: "The Meaning of an Awesome Employment Report" [1]

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Date: 2023-04-11  

Table shows the latest PCE broad-based inflation report, which was from late March and contained data through February 2023. Source is www.bea.gov, with calculations by the author. The March CPI Report is due out tomorrow (Wednesday) morning at 8:30am.

Last week’s jobs report was good. Inflation continues to decline, which is great. The March CPI report comes out tomorrow — I expect it to be benign. (Disclaimer: do NOT trade real money based on my expectations — I certainly don’t). Yesterday’s Paul Krugman Column “The Meaning of an Awesome Employment Report” (gift link) makes some key economic points a lot more eloquently than I ever could. The main point is that inflation has been falling without a surge in unemployment (so far). Here are some excerpts. That raises the question of why the Fed is still raising interest rates. Here’s some raw Krugman (with my emphasis in bold).

But maybe the important point is that almost every measure of inflationary pressure I’m aware of has improved substantially over the past year, with no increase in the unemployment rate. And there’s no hint at all of the much-feared self-reinforcing inflationary spiral, in which rising expectations of future inflation feed into current inflation. In fact, most measures of expected inflation have declined over the past year. So there’s good reason to believe that we can sustain the incredibly good job market we have right now, even while getting inflation under control. And it will be a real tragedy if exaggerated fear of inflation causes the Federal Reserve to push interest rates too high for too long, leading to a gratuitous recession that throws away many of the gains we’ve made.

The key economic problem here is whether we need a recession and period of high unemployment to reduce inflation, or whether inflation will continue to fall as economies continue to adjust to the shocks of the pandemic and invasion of Ukraine. Again, Krugman lays it out and points the fingers:

The most recent projections by the committee that sets monetary policy had unemployment rising to 4.6 percent by December. Last June Larry Summers predicted that we would need two years of 7.5 percent unemployment — more than twice the current level — to bring inflation under control.

The Fed has already raised interest rates substantially and very rapidly. The economic impacts are only beginning to be felt. The chart below shows the current yield curve, which indicates that markets think inflation will continue to fall dramatically. Why else would anyone purchase a 5-year bond at 3.5 percent when 6-month bills yield 5 percent! Source data here.

Krugman is right. Since inflation is already falling, it’s likely that other factors — such as businesses gradually adjusting to the supply chain and demand shocks from the pandemic, and working around the impact of Putin’s invasion on gas and feedstock prices — are already driving down inflation.

I think the Fed is chasing a ghost. Last year’s inflation was bad. But since last summer, prices have stabilized, and there is zero indication in the markets that businesses and consumers believe otherwise, or that we’re headed for a wage-price spiral.

If the Fed wants to punish labor markets and raise unemployment — for political or other reasons — it should own up to that policy goal in itself, not blame it on fighting the ghost of past inflation.

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[1] Url: https://www.dailykos.com/stories/2023/4/11/2163310/-Krugman-The-Meaning-of-an-Awesome-Employment-Report

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