Episode Summary
Executive Summary: David Beckworth and economist/commentator Joey Politano discuss the inflation surge, supply shocks from COVID-era demand shifts and the Russia-Ukraine war, and the Fed’s rapid hawkish turn. Politano argues inflation likely stays elevated short term due to energy, rents, and sticky goods demand, while longer-run disinflation depends on normalization, supply repair, and credible monetary policy. He also defends the Fed’s pandemic response as preferable to 2008.
Main Topics: Inflation outlook and drivers (Priority: 5/5): Politano explains why inflation remains high, citing persistent goods-vs-services shifts, supply bottlenecks, and new shocks from Russia’s invasion of Ukraine. He expects near-term pressure from energy and food, with rents keeping core inflation elevated after a lag. Housing, rents, and measurement lags (Priority: 5/5): The conversation breaks down how CPI measures housing through rents, why official inflation lags spot market changes, and why higher mortgage rates may push some would-be buyers into rentals, temporarily lifting measured inflation. Goods, services, and consumption rebalancing (Priority: 4/5): They discuss whether pandemic-era consumption shifts toward goods are reversing. Politano says goods demand growth has slowed, but the spending mix remains goods-heavy and durable-goods supply remains constrained, especially in autos. Fed tightening and financial conditions (Priority: 5/5): Politano describes how forward guidance and rate-hike expectations tightened financial conditions before actual policy moves, using credit spreads, mortgage rates, and financial conditions indexes as evidence. Fed strategy, soft landing, and policy evaluation (Priority: 4/5): The exchange weighs whether the Fed can engineer a soft landing and whether it should have tightened earlier. Politano argues that with uncertainty and fiscal stimulus in 2021, hindsight criticism is easy; he sees labor income near trend as evidence policy was not wildly off target. Lessons from 2020-2021 monetary policy (Priority: 4/5): Politano says the aggressive pandemic response was better than the post-2008 response because it restored employment and output quickly. He warns that current inflation may complicate future level-targeting or makeup-policy efforts by making inflation politically toxic. Monitorist teens and macro interest among young economists (Priority: 2/5): Beckworth and Politano discuss the online group of young macro enthusiasts, how members came to care about inflation and monetary policy, and the role of online communities in shaping economic learning and debate.
Key Arguments: Current inflation is still largely a supply-and-demand mismatch rooted in the pandemic, but near-term readings will likely worsen because of energy and commodity shocks from the Russia-Ukraine war. Housing inflation is delayed in CPI because the BLS measures rents with a lag; current spot-rent increases should feed through over roughly the next year. Higher mortgage rates may push marginal homebuyers into the rental market, which can temporarily raise measured rent inflation. Durable-goods inflation should ease over time because technological progress and normalization of supply chains tend to lower goods prices relative to services. The Fed’s hawkish pivot was already tightening financial conditions through higher yields, wider credit spreads, and higher mortgage rates before the latest rate increase. It is hard to fault the Fed for not tightening much earlier because labor markets were still weak and fiscal stimulus plus reopening uncertainty made the stance of policy ambiguous. Gross labor income is presented as a useful guide for nominal spending and suggests the economy was roughly back to pre-pandemic trend rather than clearly overheated. The 2020-2021 policy response, though now overshadowed by inflation, likely prevented a repeat of the severe post-2008 slump and should not be dismissed as a failure. Inflation is politically unpopular and may create a future institutional bias toward tighter anti-inflation responses, even when stimulus is warranted. A long-run return to low inflation is plausible because demographic slowdown, lower productivity growth, and weak real interest rates keep the U.S. from sustaining high inflation indefinitely.
Data Points: Inflation rate mentioned in article title: 7.95% - Politano’s recent piece argued inflation was already very high and could worsen before improving. Possible inflation outcome: Double-digit inflation possible - He said it could happen within the next two months if gasoline prices spiked enough. Oil price move after Ukraine invasion: About $90 to $130-$135 per barrel, then back near $110 - Used to illustrate the pass-through risk from energy shocks to CPI. Fed rate hike expectation: 50 basis points - Powell signaled a likely half-point hike at the next meeting. Fed forecast for inflation: 4.6% this year - From the Summary of Economic Projections, showing the Fed still expected inflation to fall meaningfully later. Neutral long-run funds rate: 2.5% - Discussed as the Fed’s long-run implied policy rate, consistent with low equilibrium real rates. Long-run real rate implied: 0.5% - Derived by subtracting the 2% inflation target from the 2.5% nominal neutral rate. Time since inflation article start point: About two months - Politano said double-digit inflation would require a very strong gasoline print over the next two months. Rent lag: Almost a year - Official CPI rent data lags spot rent changes by roughly a year. Goods spending growth slowdown: Over the last six to eight months - He said goods spending growth had petered out recently, even though the level remained elevated. Used vehicle index change: Down about 2% over the last month - Mannheim used vehicle value index showed some easing in used-car prices. Used car price level: Up about 40% from 2020 - Shows that even modest monthly declines still leave vehicle prices far above pre-pandemic levels. Inflation forecast at the Fed meeting: 4.6% - The Fed still expected inflation to come down sharply over the next two years. Unemployment forecast: Below 4% - FOMC projections suggested a strong labor market even with tightening. Prime-age employment to population ratio: Close to pre-pandemic levels - Cited as evidence the labor market recovery had been unusually strong. Post-pandemic trend comparison: Gross labor income near pre-pandemic trend - Used to argue nominal demand was not obviously out of control.
Pivotal Quotes: "things are likely to get worse before they get better" — Joey Politano: Describing his inflation outlook in the title of his article and in the discussion of near-term price pressures. "the economy of 2009 and the monetary response of 2009 and the monetary response of 2020, 2021, I would every day and twice on Sunday take the monetary policy response of 2020 and 2021" — Joey Politano: His core defense of the pandemic-era policy response relative to the aftermath of the Great Recession. "inflation is much too high" — Jerome Powell: Quoted from Powell’s hawkish NABE remarks, used to frame the Fed’s policy pivot.
Implications: Listeners should expect inflation to remain volatile near term, with rents and energy still feeding CPI, while Fed tightening works through markets quickly. The broader lesson is that aggressive crisis response can aid recovery, but persistent inflation may make future make-up-policy frameworks harder to defend.
About Macro Musings
Hosted by David Beckworth of the Mercatus Center, Macro Musings pulls back the curtain on the important macroeconomic issues of the past, present, and future.