Why High Inflation Has Lasted for So Long | WSJ

The Wall Street Journal

10 Nov 202204:56

EducationalLearning

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TLDRIn 2022, inflation remained above 8%, affecting various sectors due to several factors. Consumers, flush with pandemic savings, continued to spend, while pent-up demand and labor market tightness led to higher prices and wages. Companies, facing worker shortages and increased demand, raised wages, which in turn led to price hikes. The Federal Reserve's attempts to curb inflation with interest rate increases are challenging due to the unpredictable nature and timing of economic effects, with the story still unfolding.

Takeaways

📈 Inflation in 2022 remained above 8%, marking a 40-year high and impacting various sectors including gas and groceries.
💰 Consumer spending power was increased by emergency measures like stimulus checks and low borrowing costs, leading to $2.3 trillion in extra savings.
🚀 Pent-up demand post-pandemic led to increased spending in social activities and services, contributing to higher prices.
💼 Strong job market with a high demand for workers resulted in very low unemployment and companies raising wages to attract employees.
📊 Wage increases led to businesses raising prices to compensate, creating a cycle where higher costs of living further demand wage increases.
🌐 Global supply chain issues and worker shortages exacerbated the deficit of supply, leading to higher prices for goods and services.
🏠 Housing costs continued to rise as the economy reopened, affecting both the goods sector and the services sector within households.
🎯 The Federal Reserve's inflation targeting has been challenging due to the unpredictable nature of price increases across different sectors.
🛠️ Monetary policy tools like interest rate hikes have long-term effects, with peak impact on inflation occurring after three to four years.
🔄 The economy's ever-changing backdrop makes the timing and effectiveness of policy measures difficult to predict, complicating the path to a soft landing.

Q & A

What was the initial belief of policymakers about inflation last year?
-Policymakers initially believed that inflation would be transitory, meaning it would be temporary and short-lived.
Why did inflation persist for longer than expected in 2022?
-Inflation persisted due to several factors, including consumers having more to spend due to pandemic stimulus measures, pent-up demand leading to increased spending and higher prices, a strong job market with a deficit of supply, and global supply chain issues.
How did the US personal saving rate contribute to continued consumer spending?
-The US personal saving rate spiked during the pandemic due to stimulus checks and other measures, leading to $2.3 trillion in extra savings, which supported continued consumer spending even as prices rose.
What was the impact of pent-up demand on the economy?
-Pent-up demand led people to spend more on social activities like dining out and traveling, which in turn pushed companies to raise prices to meet the increased demand.
How did the excess savings contribute to the labor market after the pandemic?
-The excess savings of $1.7 trillion in mid-2022, coupled with high consumer demand, led to a strong job market with many openings and very low unemployment rates.
What is the relationship between wage increases and price inflation?
-When companies raise wages to attract and retain workers, they often increase prices to offset the higher labor costs, leading to a cycle where rising wages lead to higher prices and increased cost of living.
Why has inflation been difficult to target effectively?
-Inflation has been challenging to target because it behaves like a game of Whac-A-Mole, with price increases appearing in different sectors at different times, making it hard to predict and control.
How did the war in Ukraine affect inflation in 2022?
-The war in Ukraine contributed to inflation in 2022 by driving up the price of jet fuel, which in turn increased airline ticket prices.
What is the Federal Reserve's approach to tackling inflation?
-The Federal Reserve has been using monetary policy tools, such as raising interest rates, to try to curb inflation. However, these measures have long and variable lags, and their effects on different sectors of the economy can be uneven.
What does a 'soft landing' in the context of monetary policy mean?
-A soft landing refers to a scenario where the economy slows down enough to control inflation without entering a recession, thus maintaining economic stability.
What was the Federal Reserve's indication regarding future interest rates?
-The Federal Reserve indicated that they may push interest rates higher than originally expected to further combat inflation.

Outlines

00:00

📈 Inflation's Persistence and Its Causes

The paragraph discusses the unexpected persistence of high inflation rates, which were initially thought to be temporary. It highlights that inflation remained above 8% throughout 2022, affecting various sectors such as gas and groceries. The reasons for this prolonged inflation include consumers having more to spend due to pandemic-era stimulus measures, pent-up demand as economies reopened, and supply chain disruptions leading to shortages of both labor and goods. The paragraph also touches on the challenges the Federal Reserve faces in predicting and managing inflation due to its unpredictable nature and the time lag of monetary policy effects.

Mindmap

Keywords

💡Inflation

Inflation refers to the general increase in prices and fall in the purchasing value of money over time. In the context of the video, it highlights the persistent rise in prices above 8%, marking a 40-year high, affecting various sectors such as gas and groceries. The video discusses the unexpected duration and intensity of inflation, which was initially thought to be transitory.

💡Transitory

The term 'transitory' implies something that is short-lived or temporary. In the video, it is used to describe the initial belief of policymakers that the inflation experienced would be a temporary phenomenon. However, the persistence of high inflation rates contradicted this expectation, leading to a reevaluation of its causes and potential longevity.

💡Consumer Spending

Consumer spending refers to the amount of money spent by households on goods and services. The video emphasizes the increased consumer spending power due to emergency measures like stimulus checks and low borrowing costs, which contributed to a large stockpile of savings. This spending, in turn, has been one of the factors sustaining high inflation rates as consumers continue to purchase goods and services despite price increases.

💡Pent-Up Demand

Pent-up demand describes a situation where consumer desire to purchase goods and services has been restrained for a period and then is released once restrictions are lifted. In the video, pent-up demand is highlighted as a reason for increased spending in sectors like restaurants and travel, as people were eager to return to social activities post-pandemic, leading to higher prices as companies tried to meet this surge in demand.

💡Excess Savings

Excess savings refer to the amount of money saved that exceeds the usual or expected savings levels. The video mentions that the US personal saving rate spiked, contributing to $2.3 trillion in extra savings. This excess savings has been a driving force behind continued consumer spending, even as prices rise, thus contributing to the sustained inflation.

💡Labor Market

The labor market encompasses the availability and demand for workers and jobs within an economy. The video discusses the strong job market post-pandemic, with a high demand for workers leading to very low unemployment rates. Companies have had to raise wages to attract and retain employees, which in turn has contributed to inflation as businesses increase prices to offset the higher labor costs.

💡Global Supply Chains

Global supply chains involve the network of businesses and processes that produce and distribute goods worldwide. The video points out that shortages of workers and goods due to disruptions in global supply chains have contributed to the deficit of supply, which, coupled with the excess demand from consumers, has exacerbated inflationary pressures.

💡Interest Rates

Interest rates are the cost that borrowers pay to lenders for borrowing money. The video explains that the Federal Reserve has been increasing interest rates to combat inflation. Higher interest rates make borrowing more expensive, particularly in sectors like housing, which can help to cool down the economy and reduce inflationary pressures over time.

💡Monetary Policy

Monetary policy refers to the actions taken by a central bank to influence the economy by adjusting the cost and availability of money and credit. In the video, it is mentioned that the Fed's monetary policy, including interest rate increases, has long and variable lags, meaning it takes time for these measures to affect the economy. This complicates the task of forecasting inflation and the effectiveness of policy responses.

💡Soft Landing

A soft landing refers to a scenario where an economy slows down gradually without entering a recession, thus avoiding a hard economic landing or crash. The video discusses the challenge of achieving a soft landing in the face of persistent inflation and the need for more restrictive policies, which could potentially narrow the path to such a balanced economic outcome.

💡Whac-A-Mole

Whac-A-Mole is a metaphor used in the video to describe the difficulty in targeting and controlling inflation. Just as the game involves trying to hit moles as they pop up randomly, policymakers face the challenge of inflation appearing in different sectors of the economy at different times, making it hard to predict and manage effectively.

Highlights

Policymakers initially believed inflation would be transitory.

Inflation persisted above 8% throughout 2022, reaching a 40-year high.

Consumers had more to spend due to pandemic emergency measures.

Stimulus measures resulted in $2.3 trillion in extra savings.

Pent-up demand led to increased spending and higher prices.

The Fed estimated a stock of $1.7 trillion in excess savings by mid-2022.

Companies responded to increased demand by hiring more workers.

A strong job market with low unemployment led to higher wages.

Wage increases led to companies raising prices to compensate.

Inflation proved difficult to target, likened to a game of Whac-A-Mole.

Price increases affected various sectors of the economy at different times.

The war in Ukraine drove up the price of jet fuel, affecting airline tickets.

Housing costs, including rents, continued to rise.

Inflation impacted everyday life from goods to services.

The Fed faces challenges in forecasting the duration of policies to curb inflation.

Policy may need to be more restrictive, narrowing the path to a soft landing.

Interest rate increases have a peak effect on inflation after three to four years.

Monetary policy has long and variable lags, making its effects unpredictable.

The Fed made an interest rate increase in November and may push rates higher.

Transcripts

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Takeaways

Q & A

What was the initial belief of policymakers about inflation last year?

Why did inflation persist for longer than expected in 2022?

How did the US personal saving rate contribute to continued consumer spending?

What was the impact of pent-up demand on the economy?

How did the excess savings contribute to the labor market after the pandemic?

What is the relationship between wage increases and price inflation?

Why has inflation been difficult to target effectively?

How did the war in Ukraine affect inflation in 2022?

What is the Federal Reserve's approach to tackling inflation?

What does a 'soft landing' in the context of monetary policy mean?

What was the Federal Reserve's indication regarding future interest rates?