Why experts should be modest after miscalculating their inflation – Orange County Register

As the biggest inflation spike in 50 years occurs, the utter failure of economists, their models, and many experts to predict what’s to come is worth highlighting. . The biggest glitch in the story, of course, is that of the Federal Reserve itself, which has a clear mandate to keep prices stable, and seems surprised by their lack of stability.

It is no exaggeration to say that the Fed did not correctly predict the level of inflation. On February 8, 2021, Raphael Bostic, president of the Atlanta branch of the Fed, said, “I really don’t expect we’ll see a spike in inflation over the next 12 months or so.” Days later, Boston Fed President Eric Rosengren echoed this view, noting that he would be “surprised” to see broad-based inflation maintained at 2% before the end of 2022.

As the saying goes, problems often start from scratch. When testifying before the House Financial Services Committee in February 2021, Fed Chairman Jerome Powell predicted that it could take more than three years to reach the 2% inflation target.

Around the summer of 2021, inflation becomes hard to ignore. However, Fed officials insist that it is not yet time to roll back their interim policies as they are not responsible for the price increases. The main antagonists were identified as supply chain constrictors. Once resolved, we were told, the inflation would only be temporary.

Testifying last June before a House subcommittee, Powell said: “If you look… if you look at the categories where these prices have actually increased, you’ll see that those tend to be the areas that are directly impacted. by reopening. It’s something that we’ll go through for a while… and it’ll pass. And it shouldn’t leave much of a mark on the ongoing inflationary process.”

In a speech in Jackson Hole, Wyoming, last August, Powell once again reiterated this sentiment. He also noted that “Long-term inflation expectations have moved much less than actual inflation or short-term expectations, suggesting that households, businesses, and market participants also believe that The current high inflation rate is likely to prove transitory.”

But as Hoover Institute economist John Cochrane reminds us, long-term inflation expectations are notoriously poor predictors of inflation. Sadly, few people listened and the “temporary” group was born.

I think this is a useless label because inflation is always transient. Even the inflation of the 1970s ended in the 80s. What matters is whether transient inflation means a few weeks, months or years. Inflation continued to rise, and the transient meaning continued to change so much that Powell officially abandoned the word on November 30. By then, inflation had reached a staggering 6.8%.

Many non-Fed officials have made their own bad predictions based on complex forecasting models and/or expectations — the same expectations that Cochrane encourages us not to get too complacent. Theories as to why we shouldn’t worry abound. It’s caused by base-effect price increases, supply chain constraints, drought in Taiwan – everything but the Fed’s expansionary policies and congressional overspending, in part because of a number of reasons. experts cheered for these actions.