A Graphical Framework for Thinking about Inflation Surprises

From the my EconoFact article “Rising Inflation?“, which begins:

There are concerns about inflation rising, and perhaps even accelerating, fueled by an overheating economy as a consequence of the large fiscal stimulus, the Federal Reserve’s commitment to keeping interest rates low for an extended period, and pent-up demand for consumption that was foregone during the pandemic. The last bout of high and rising inflation, in the 1970s, was during a time of economic distress and only ended with a painful recession engineered by the Federal Reserve in the early 1980s. Are we in for a similar episode today? While inflation has been high in the past few months, at least compared to its level since the Great Recession that began in 2008, several factors suggest that we should not be concerned about sustained and accelerating inflation – at least not yet.

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Numbers for the Innumerate

A reader writes:

I think, however, there is a need to more closely examine the overheating of the economy and paths and timing of unwind, for example. As you’ll recall, I argued that the economy was under suppression, not recession, and that’s proving right. So we’re seeing a kind of overheating I can’t recall since maybe the late 1960s or 1970s.

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