As the covid-19 pandemic wreaked havoc on supply chains and triggered superheated demand, consumer prices rose 7 percent in 2021 — the highest in almost 40 years — but a Harvard economics professor claims that almost nobody saw inflation coming and almost everyone missed it.
Most private forecasters underestimated price gains, said Harvard economics Professor Jason Furman, who served as chairman of the Council of Economic Advisers for most of President Barack Obama’s second term. “Inflation *should* be more predicatble,” Furman tweeted.
The consumer price index jumped 7 percent in 2021, the Labor Department said on Wednesday, Jan. 12. That’s up from 6.8 percent annually in November.
While Americans saw prices rise in 2021 for almost everything, Federal Reserve Chairman Jerome Powell repeatedly downplayed the risk of inflation for most of 2021. On Dec. 1, Powell said that he is retiring the word “transitory” to describe the inflationary outlook and believes that the omicron variant could threaten the U.S. economy.
“The US authorities say don’t worry about inflation, like they said don’t worry too much about COVID and wearing masks, b/f things were obvious. They have the animal feed prices looking like it’s ready to do a Bitcoin/Crypto parabolic spike,” The Moguldom Nation CEO Jamarlin Martin tweeted in March 2021.
Peter Schiff, the CEO of equity fund Euro Pacific Capital, who famously publicly predicted the 2008 housing crisis, has another prediction: that inflation will help push the U.S. economy into recession.
“The government is creating a lot of inflation, but the last thing they want the public to know is that there really is inflation,” Schiff said on his Oct. 14, 2021, podcast. “That would mean they might have to do something about it. The pretense that there isn’t enough inflation is what allows the Federal Reserve to get away with its loose monetary policy.”
Economists surveyed in January 2022 by The Wall Street Journal have raised their forecasts of how high inflation will go and for how long. “We’re in a transitional phase right now,” said Joel Naroff, chief economist at Naroff Economics LLC. “We are transitioning to a higher period of inflation and interest rates than we’ve had over the last 20 years.”
Naroff and the other survey respondents describe a generational shift from lower inflation of the past two decades that could create new challenges for households, policymakers and investors who expect inflation below 2 percent.
Larry Summers, a Harvard professor and former Treasury secretary under President Barack Obama, sounded the alarm almost a year ago when he warned that U.S. government bailout payments could spawn inflation. Initially, Summers was considered “a bit of a crank” for doing so but not anymore, said Stephanie Flanders, host of the Bloomberg podcast Stephanomics, in a Dec. 23, 2021 interview.
“It seemed to me that we were overstimulating the economy and that people had not seen inflation in 40 years,” Summers said. “So they assumed it was something you didn’t need to worry about, but that if you just did a straightforward analysis, demand was gonna run ahead of supply.”
Forecasting inflation “has been incredibly challenging” over the past year and will remain so, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank AG, in a Bloomberg report.
Why? Partly because of the way the coronavirus pandemic developed vs. expectations of people’s spending behavior.
Economists expected people to spend less on merchandise as the economy reopened, and to start spending more on travel, dining out, and entertainment venues. That was expected to help relieve some of the strains on the supply chain.
But the delta wave of the virus kept massive pent-up demand skewed toward merchandise and added further strain to supply chains, said Ryan Sweet, head of monetary policy research at Moody’s Analytics Inc.
Harvard University economist Furman mentioned three reasons why he thinks nobody saw inflation coming, as presented on Jan. 7 at the American Economic Association:
You can read more on Furman’s reasoning here.
“The two things we can count on is that economists will never see ‘it’ coming, and that economists will then use words like ‘nobody’ because acknowledging the existence of non-economists that have useful opinions is against the point of economics,” tweeted Matt Stoller, a director at the American Economic Liberties Project and author of “Goliath,” a book about monoply power.
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?