Jonathon Hazell on the Costs and Causes of Inflation and the Phillips Curve Debate
Oct 7, 2024
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Jonathon Hazell, an assistant professor at the London School of Economics, dives deep into the intricate world of inflation and its costs. He discusses the psychological strains on workers during inflationary periods and how real wages suffer. The conversation extends to the ongoing Phillips Curve debate, where he examines inflation expectations and Federal Reserve responses post-pandemic. Hazell also outlines policy implications and challenges regarding inflation targeting, illustrating the delicate balance policymakers must maintain.
Public aversion to inflation arises largely from stagnant wages failing to keep pace with rising prices and purchasing power erosion.
The emotional and social costs of inflation manifest in workers' stress and conflict over securing necessary wage adjustments during rising inflation periods.
Recent discussions on the Phillips Curve suggest a complex relationship between inflation and economic slack that influences future policy implications.
Deep dives
Key Questions Surrounding Inflation
The discussion centers on two primary questions regarding inflation: why it is widely disliked and what causes it. As inflation rates have surged, the preference for low inflation has resurfaced as a significant public concern. Persistent inflation can lead to political ramifications, as evidenced by recent elections where inflation was a pivotal issue. Scholars have noted that understanding these concerns is crucial for macroeconomists, especially now when inflation trends affect both policy and public sentiment.
Understanding the Discontent with Inflation
The podcast delves into why people strongly oppose inflation, suggesting that traditional economic models may not adequately capture public sentiment. Generally, individuals report that their aversion stems from the perception that wages fail to keep pace with rising prices, leading to a decrease in their purchasing power. This discomfort may not be addressed adequately by conventional economic theories, which tend to focus on more abstract costs, such as menu and shoe leather costs. Instead, many people fear the tangible impact of wages stagnating against the backdrop of rising costs.
Inflation and Wage Conflict
A notable paper presented discusses the conflict costs associated with rising inflation, which highlight that workers often need to engage in difficult negotiations to secure pay increases that match inflation rates. This conflict not only raises stress but can also lead to significant economic implications, where workers find themselves in a cycle of needing to advocate for wage adjustments due to external inflationary pressures. The findings suggest that these conflicts do not merely represent the economic dynamics but also have profound effects on worker wellbeing and happiness. By framing inflation as a 'tax on conflict-averse individuals,' the paper underscores the emotional and social dimensions of economic scenarios.
Phillips Curve and Recent Inflation Trends
A comprehensive analysis of the Phillips Curve concept connects inflation with economic slack, revealing adaptations to economic conditions post-2020. Preliminary evidence suggests that despite assumptions of a flat Phillips Curve, recent inflation data may reveal its relevance, especially as inflation expectations have fluctuated. Exploring this dynamic raises questions for future policy implications, particularly in how they can either exacerbate or alleviate inflationary pressures. These considerations emphasize the importance of monitoring various inflation expectations to help inform better fiscal and monetary policy decisions.
Deficits and Their Role in Inflation
The research highlights that substantial fiscal deficits correlate with inflation surges, delineating a complex relationship where blame cannot be solely assigned. Through a high-frequency narrative approach, an important event, the Georgia Senate elections, is analyzed to understand the impacts of reported fiscal stimulus on inflation. Deficits stemming from substantial stimulus efforts are suggested to account for a significant portion of inflation observed in recent years, underscoring the necessity of comprehensive fiscal monitoring. The findings propose that while deficits were influential, inflation was also shaped by concurrent external shocks, suggesting a multifaceted economic landscape.
Jonathon Hazell is an assistant professor of economics at the London School of Economics and is a returning guest to the podcast. He rejoins David on Macro Musings to talk about the costs of inflation, the Phillips curve Debate, and the lessons learned from the post-pandemic inflation surge.
