There are growing signs that the 2021-2022 inflationary boom is abating. A measure of the Consumer Price Index (CPI), released yesterday, showed a decline in prices year-on-year from 7.1 percent in November 2022 to 6.5 percent in December 2022. While still high compared to the past four decades, key inflation indicators have fallen from their highest levels. this summer. Such an assessment could easily prove premature (during the 1970s, the end of price hikes was recalled any number of times before Volcker’s decisive action) but for now, the worst appears to be behind us. Even if this is the case, and conditions of no inflation become the prevailing economic environment over the next few years, both the pace at which the decline in the general level of prices continues, and the price to be paid for deflationary monetary policies, i.e. stagnation, are the looming issues in near future.
An additional concern relates to cultural apprehension of current events. Popular narratives play a counterintuitive role in understanding politics and shaping public views of government institutions and their affiliates. Many citizens, for understandable reasons, gravitate towards interpretations that are more in line with their current views. However, the narrative power effect is still appreciated among economists. In 2017, Dr. Robert J. Schiller, professor at Yale University and 2013 Nobel Memorial Prize laureate, noted that the social sciences, anthropology, history, sociology, psychology, and political science, have a distinctly higher research focus on the study and effects of narratives. what the economy does. this is important. The world we are in directly feeds into the world we will soon be in, and the collective interpretations in formation today will become the authoritative accounts of tomorrow.
Take, for example, the monetary policy campaign between 1993 and 1995, which led to former Federal Reserve Chairman Alan Greenspan being widely crowned as “The Maestro”. Now known as a “soft landing,” the idea that under Greenspan’s deft guidance the Fed skilfully took a narrow path between rising inflation and slowing growth (or stagnation) is the dominant one to this day. But like many established economic narratives, this one has coalesced along decidedly partisan lines.
In fact, there were many other factors that worked to create the conditions of the mid-1990s for which the Federal Reserve has won much praise. World oil prices fell dramatically after the first Gulf War. Markets in Eastern Europe and Russia were opening for the first time in half a century, and trade with China was beginning to flourish. All along, technological advances, a few years before the Internet revolution began, were rapidly boosting productivity. The “soft landing” was also not as “soft” as we remember. The increase in interest rates led to a rise in defaults and bankruptcies, with total bankruptcy filings (both corporate and non-business) rising 34.6 percent between 1993 and 1996. The bond market collapsed, impeding many companies’ access to financing. Two major crises occurred: the largest domestic bankruptcy file in US history in Orange County, California, and the Mexican peso crisis, both of which were directly related to rising interest rates. If more skepticism has been expressed as to what central bankers might actually do, or more caution expressed regarding the complex nature and implications of monetary policy, who knows? It is possible that the dotcom bubble of the late 1990s, the bear market of 2002, and the housing bubble of the early 2000s (which led directly to the Great Recession in 2008) unfolded differently, if at all.
The Biden administration has blamed the price hike on the COVID virus, Vladimir Putin, gas station owners, shipping companies, and other unconscionable scapegoats. Fortunately, none of it was particularly compelling to the American people. A more subtle shift may occur, however, as prices fall and the memories of beleaguered consumers shorten. The current chronology, which also happens to be the most accurate, is that the last two years of inflation are the insidious and unintended consequence of panicked and deported monetary technocrats. But as with the so-called soft landing in 1994, a competing narrative is likely to emerge. In this report, central bankers will have remedied an existential danger by ingeniously flooding the world with trillions and trillions of dollars. In doing so, they expertly engineered a spike in inflation to save the world from catastrophe, then ingeniously stopped the fire when necessities abated.
If this narrative prevails, a number of unfortunate outcomes are possible. At the very least, a Fed so revered is likely to be the beneficiary of more policy mandates. This may be an unfortunate step back, at a time when greater scrutiny of their conflicting mandates and an increasingly “wake-up” of policymaking is desperately needed. Central banks around the world may be emboldened to engage in more monetary policy shenanigans. Worst of all, future monetary policy officials may view US monetary policies in the era of the pandemic as an indication of a new level of efficiency, and seek to apply them in the future.
The recent update on inflation has been devastating and unnecessary, but nonetheless very useful. Let us all hope inflation continues to be swiftly reduced, and if it does, we remain aware that the outcome is despite central bankers and their narrow assortment of belated and unpredictable policy tools, not because of them.