| The Federal Reserve's Beige Book might have been titled We Were Wrong About Inflation and Growth. It noted in the general summary that most of the Fed's 12 districts reported "significantly elevated prices" while... | | | | | |  | | October 20, 2021 | | | Today's Top Stories From the Breitbart News Desk The Federal Reserve's Beige Book might have been titled We Were Wrong About Inflation and Growth. It noted in the general summary that most of the Fed's 12 districts reported "significantly elevated prices" while also reporting growth that was merely "modest to moderate." In other words, we're a far cry from the economy the Fed thought we were going to have going into the end of 2021. Part of the problem is that the Fed's experience with both high and low inflation likely misled it about inflation in this economic cycle. Fed officials know the history well enough. The Fed thought the so-called natural rate of employment was around four percent in the late 1960s, a figure which subsequent economic work suggests was a point too low. They continued to think the natural rate was lower than it was in the 1970s; so when productivity slipped and the oil shock hit, inflation exploded much higher than expected. The lesson here was initially that the Fed needed to be careful not to underestimate how low unemployment could get before sparking inflation. That lesson changed in recent years, when unemployment dropped far below the Fed's estimate of around 5.5 percent unemployment as the non-inflationary rate without sparking any notable inflation. So the Fed is currently operating under the idea that the natural rate of employment is somewhere close to the lows pre-pandemic. This appears to be a case of generals fighting the last war. Just because the natural rate of unemployment may have fallen below four percent pre-pandemic doesn't mean it is there now. A better conclusion from the different bouts of misestimation would be something more humble. Perhaps we do not and cannot know the noninflationary rate of unemployment ahead of time. The world is complex, and the economy is hard to predict. A big takeaway may be that the so-called natural rate of unemployment may move around a lot more than we think and for reasons we do not understand too well. In any case, the presumption going into the current recovery was that we would not be afflicted with high inflation unless the economy was overheating. That allowed establishment media outlets to talk about "silver linings" of inflation. Yet now we have slow growth and high inflation — not overheating so much as guzzling far more gas to get fewer miles. – Alex Marlow & John Carney
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