CAMBRIDGE, Mass. —In 2008, as the global financial crisis was ravaging economies everywhere, Queen Elizabeth II, visiting the London School of Economics, famously asked, “Why did nobody see it coming?” The high inflation of 2021—especially in the United States, where the year-on-year increase in consumer prices reached a four-decade high of 7% in December—should prompt the same question.
Some of this collective error resulted from developments that forecasters did not or could not expect. Fed Chair Jerome Powell, among many others, blamed the Delta variant of the coronavirus for slowing the reopening of the economy and thus driving inflation higher. But Powell and others had earlier argued that the increase in inflation in the spring of 2021 was spurred by an overly rapid reopening as vaccination reduced case numbers.
This brings us to a more important source of forecasting error: not taking our economic models seriously enough. Forecasts based on extrapolation from the recent past are nearly always as good as, or better than, those based on more sophisticated modeling. The exception is when there are economic inputs that are well outside the realm of recent experience. For example, the extraordinary $2.5 trillion in fiscal support for the U.S.
Labor supply A final set of errors arose because our models were missing key inputs or interpretations. To the degree that people relied on economic models, they often used a Phillips curve to predict inflation or changes in inflation based on the unemployment rate. But these frameworks had difficulty reckoning with the fact that the natural rate of unemployment likely rose, at least temporarily, as a result of the COVID-19 crisis.
Multipliers indicated that total spending in 2021 would go up a lot, while production constraints suggested that output wouldn’t increase by as much. The difference was unexpectedly higher inflation.
Really……no one seen this coming? Really?
everyone saw inflation coming. because that's where speculation heads to in times of crisis. into value stocks, into commodities, into essentials.
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