Inflation in the US is less worrisome than feared, according to a study

But perhaps the problem is not the models per se, but the data that is fed into them. Traditionally, they cover economic events since World War II and the correlations and patterns that have been observed during that period.

“Economists Focus Too Much on Postwar Data”, said the former chief economist of the International Monetary Fund and professor at Harvard University, Kenneth Rogoff. “When experiencing different and unusual shocks, it is extremely helpful to look at a slightly longer period of time.”.

That’s exactly what Columbia University professor, Stephanie Schmitt-Grohe, in his analysis of the recent rise in inflation to multi-decade highs. And his numerical calculation, which dates back to 1900, suggests that the current price explosion may not be as worrisome as many fear.

Inflation was much more variable, with wide swings up and then down, from 1900 to the war years. That raises the possibility that the latest price burst will prove as short-lived as it was then and not take root in the economy, as it did from the late 1960s to the 1970s.

The last time the world suffered from a pandemic, in 1918, inflation was on the rise. But by 1921, it had collapsed: prices fell 11% that year.

When Schmitt-Grohe ran his model on data from 1955 to 2021, it showed a 2.5 percentage point increase in what he called the permanent component of inflation above the Fed’s 2% price target.

When entry was extended to 1900, the increase was only half a percentage point, a pricing problem notably easier for Fed Chairman Jerome Powell and his colleagues to solve.

That doesn’t mean they shouldn’t raise interest rates to slow rising prices, Schmitt-Grohe said.

“The correct policy response if you want to reduce inflation is to have a temporary increase in the federal funds rate and then lower it again.”, he commented on January 7 at the annual conference of the American Economic Association.

In a presentation made by rogoff At the conference that day, he used data going back 1,300 to argue that the global economy is unlikely to return to a regime of ultra-low interest rates once the pandemic has passed.

Although yields have been declining for centuries, the decline has been very slow. The sharp decline seen in the aftermath of the 2007-2009 financial crisis, in which some bond yields turned negative, was an anomaly that is now being reversed.

He argued that a variety of factors, including rising government deficits and debt and upcoming investment to combat climate change, will push rates across the board above the low levels seen in the years after the financial crisis.

This is not the first time that rogoff Go back in history to understand the present and forecast the future.

In his 2009 book “This time is different: eight centuries of financial foolishness“, With carmen reinhart, rogoff he used eight centuries of data to argue, correctly, that the economic recovery from the financial crisis would be slow and prolonged.