In just the past few days numerous analysts have opined on the risk of overheating from aggressively easy monetary and fiscal policy continuing even as the pandemic drag abates. This overheating could, the story goes, lead to an acceleration of inflation. The worry is misplaced.
The concern is an artifact of faulty economic theory. Growth that is “too fast” causes inflation. No, it doesn’t.
To understand why, recall the observations we made in our last post, Financial Media Discovers Inflation. Conventional inflation measures, narrowly focused on domestic consumer prices, lag actual inflation. The expectation that we will first experience a surge in real GDP, followed by a surge in inflation, simply results from measuring inflation with a lag. Since real GDP is calculated by measuring nominal GDP and then backing out inflation, the understatement in the early inflation measurement results in an overstatement of real GDP. Then as inflation filters into lagging measures, it’s recognized as such. This leads to the fallacy that the early growth in real GDP played some causal role in the following inflation.
What actually happened: The inflation was there all along. It was not caused by “the economy running too hot”. It was caused directly by the aggressive monetary and fiscal policy.
3 thoughts on “Economic Overheating Worries Overblown”
Hi there! Would you mind if I share your blog with my zynga group? There’s a lot of people that I think would really appreciate your content. Please let me know. Cheers
Hey There. I discovered your weblog the use of msn. This is
a really smartly written article. I’ll be sure to bookmark it and come back to learn extra of your helpful information. Thanks for the post.
I will certainly return.
Every weekend i used to go to see this web page, for the
reason that i wish for enjoyment, as this this website conations truly pleasant
funny stuff too.