Upside surprises in inflation data contradicting disinflationary expectations due to lockdowns and reduced demand.
The reverse of globalization, flawed comparisons to the Great Depression, and loose monetary policy contributed to the rise in inflation.
Deep dives
Understanding the Upside Surprises in Inflation Data
In the podcast, economist Stephen King discusses the initial controversy surrounding the idea of inflation at the beginning of 2021. He explains that upside surprises in inflation data were observed in the US, UK, and Eurozone, contradicting the expectations of disinflationary pressures due to lockdowns and reduced demand. As the year progressed, inflation trends expanded to various sectors, including goods, services, and wage pressures. King argues that this suggests a broader issue with inflation and raises questions about policy and market responses.
Examining Mistakes in Interpreting Inflation Data
King explores several mistakes made in interpreting inflation data, including the reverse of globalization, the impact of COVID-19 scarring, incorrect comparisons to the Great Depression, and the changing role of central banks. He highlights how the reverse of globalization, brought on by strained US-China relations and the decline of hyper-globalization, has contributed to the erosion of the Great Moderation. King also emphasizes that the comparisons to the Great Depression are flawed, as the economic and financial turmoil experienced during the pandemic differed significantly. Additionally, he discusses how the actions of central banks during the pandemic, characterized by loose monetary policy, contributed to the subsequent rise in inflation.
Lessons from History on Inflation
Drawing from historical examples, King presents 14 urgent lessons from 2000 years of history related to inflation. He shares examples such as Emperor Diocletian's failed attempt to control prices during Roman times and the Confederate and Union states' differing stances on inflation during the American Civil War. Furthermore, King highlights the inflationary challenges of the 1970s and the persistent erosion of cash savings due to long-term inflation. He also discusses the importance of recognizing historical patterns and lessons to navigate current inflationary risks effectively.
