You emphasis the supply shock as a cause of inflation. However there has been a huge increase in demand as consumer switched spending from services to goods, presumably for pandemic related reasons. Also actual supply has increased. It is really a demand shock.
And the CTC expansion's ending. And the EITC expansion. And the student-loan payment moratorium. I don't think it's an UPWARD demand shock we need to worry about at this point!
Regardless of the balance of supply vs. demand side shock, it does not make sense for the fed to respond by increasing unemployment(raising rates) when the cause is unrelated to an overheated economy. The supply side shock we are looking at is, as you said, caused by changes in purchasing preferences.
Glad the Fed didn't raise interest rates...yet. I'm doubting whether they should even be penciling in 3 rate hikes next year, though; the supply-side inflationary factor of crude-oil prices is already down about 15% on its October high, and on the demand side we have expiry of the CTC expansion, the EITC expansion, and the pause on repaying federal student debt (https://twitter.com/MaxKennerly/status/1471118243867906054).
As for Omicron, getting a booster is indeed a sensible and obvious response. More generally, we gotta get low-income countries vaccinated as well.
For whatever reason, I was truly delighted to see a combined omicron - inflation article. Thanks.
With the pandemic, we have a complete leadership vacuum. Throughout, there’s been a disconnect between what “the experts” are saying and what government says or tries to implement. A pandemic response needs to be coordinated, well communicated, flexible, and above politics, and yet it hasn’t been any of those things. At any given time about half the population is suspicious or resistant, with predictable results.
Combine that with the fact that politicians don’t want to piss off “their” voters, and it’s clear that no one wants to suggest cancelling a second Christmas. If our leaders (“leaders”) all got together and said in unison “This looks really bad; please don’t travel this Christmas; let’s temporarily close schools again till we get through this first big omicron wave,” we might be able to mitigate some of the worst effects.
It’s no surprise to anyone, though, when our politicians continue to fail utterly at their jobs. But now, what I find so alarming is that _even the experts_ whom I’ve come to trust on the pandemic are not freaking out to the extent that I think the situation merits.
Is it burnout from two years of constant bad pandemic news? Are we becoming habituated to millions of people dying? Is it simply the case that human nature being what it is, we really _want_ this to be over and so we’re behaving as if it _is_ over (or at least, proclaiming in unison “we just need to live with it” and going about our business while in denial about the immediate consequences?
It’s very unwise to travel this Christmas and gather in large groups. It’s very unwise to open the schools in January. No one wants to hear it.
Yes, omicron multiplies at incredibly high rates in your bronchi and less so in your lungs, but (1) bronchi are part of your lower (not upper) respiratory tract, ie, they’re really close to your lungs; (2) this can easily progress to pneumonia and destroy your lungs, albeit perhaps more slowly, which remains to be seen, since there’s already a big lag between infection and death, possibly even a bigger lag with omicron; (3) and there’s still the small matter of cytokine storms. If a cytokine storm is your body’s freak-out response to a serious infection, a serious infection with larger numbers of virus makes that response more likely.
It seems to me that we, collectively, are so desperate to minimize what we can see with our own eyes, and we’re so desperate to find some positive spin to justify going ahead with our holiday plans, that we are not fully acknowledging the extent to which this seems _really bad_ and could dwarf the number of deaths we’ve seen so far (not rates, but numbers).
Between HCW burnout and the sheer numbers of patients, health care systems could crash. People are already leaving health care in droves. They just can’t deal with it anymore. Forget about getting a timely cancer diagnosis or needed surgery. Forget about getting a hospital bed for your loved one with a heart attack or stroke. There are ripple effects.
The bottom line with omicron is that it’s new, it’s incredibly fast-moving, and _we just don’t know yet_ what will happen. We just don’t know. But it looks really bad, and yet en masse we seem to be trying to convince ourselves it’s not. This ends badly.
It's about a month now since Omnicron started taking off in South Africa - wouldn't we be seeing notable deaths/hospitalization/ICUS/intubations by now? I know there's a lag in how those can happen, and often a lag in how they are reported (not sure the details of SA) but if cytokine storm are going to start dropping people because of Omnicron, why aren't we seeing that yet out of S Africa?
I think we simply don’t know enough about it yet. There’s a lag of about a month until you see the deaths, so we’ll know more soon. I was just in a meeting tonight at work where the experts-of-experts were cautiously optimistic (or maybe they’re just as desperate as the rest of us to proceed with their Christmas plans and see their families, so they’re all seeing what they want to see). Just kidding… mostly. I hope they’re right.
All I'm seeing from the most recent data and most informed experts is increasingly optimism on Omnicron. A bit cautious optimism, but the caution has been day by day diminishing as the optimism rises. We'll see, there is of course lots of uncertainty, as there is with everything around covid.
That said - uncertainty doesn't always have to mean "close schools / close businesses / shut down travel". There is a cost to all those things and we can't just pay that cost every time there might be a problem. Where the threshold lies between "better safe than sorry" and "crying wolf" is something each person will have a different sense of.
My personal sense is we'd want to be a lot more sure that omnicron is going to be a big deal before doing any of those things. I don't think they buy a lot of time or do much more than flatten the curve a bit, at a cost of fraying society and punishing children of lower income / working class people. I don't see any willpower for a mandated shutdown like in April 2020 unless it was very clearly effective in avoiding, not just delaying, a lot of death and sickness.
I agree that just in the time since I wrote my original comment, there have been reasons for some cautious optimism re the variant. We still don’t know much about it yet.
So Larry Summers is apparently "right" about inflation but almost certainly wrong in its implications. He thought the COVID relief bill was far too large and threatened us with inflation. But let's say that the Fed's actions to taper QE and raise interest rates 0.5-0.75 points work to tame inflation and gradually bring it down to the 3% level or lower, without serious impact on jobs -- a "soft landing" then.
Would then a year or so of somewhat higher inflation have been that damaging? Would Americans have been better off if Summers' advice had been followed and they had received far less financial support back last winter?
No, I'd say that Summers prescription was dead wrong, even if his prediction of inflation was better than most others. That's because (under my scenario) he was dead wrong about the ability of governmental institutions, like the Fed, to adjust and fine tune policy when conditions prove different than expected.
The new Fed policy may not work; inflation may be more intractable than we hope, proving Summers' warnings prescient. But I'm guessing no: we're already seeing inflationary pressures dampening (e.g., the fall in oil prices), and inflation expectations are coming down.
So, I'll give Summers one and a half cheers. But Biden and the Fed three cheers. In this crisis, it was always better to overshoot and be ready to adjust later.
Wasn’t one of the big negatives of covid the long incubation period? If you get sick faster, seems like that’s faster detection -> test -> isolate cycle.
Seems to me like some institutions are functional, and others are extremely dysfunctional. Large chunks of the population are blaming the inflation on Joe Biden and “big government”. And they won’t listen to the fact that the inflation is worldwide and not just in the USA, including at higher rates in countries with much less government than the USA. This is a failure of media and education. The same media ecosystem which thought it would be a good idea to give candidate Trump (who almost all assumed “can’t win”) a gold-played platform in 2026 for ratings. Powell and our scientists sre doing a fine job, but a lot of damage is already done.
Do you think the impact of student loan payments resuming and the child tax credit ending could upend inflation and cause demand to decrease substantially?
I know in my household, which is admittedly unusual, we are planning for a loss of $1,600 a month (combo of increased costs and decreased rev) due to these two factors.
It is delusional to think the Fed has “tamed” inflation.
Does the Fed increasing interest rates by 0.75% mean workers won’t be asking for 6.8% raises to offset the inflation losses from this past year? Or the 6% they are expecting for next year?
Yet another case of mistaking the stock and/or the bond market for reality.
Spot on, excellent article. Once again you are the mainstream voice of reason and accuracy. Seems like about the only one these days!
I agree with you that the government communication strategy such as it is was bad. I wonder if it has always been this way with medicine except no one ever noticed it because we didn't have insta information via soc media and previously they had more time to get their ducks in line. And no major pandemic like this before.
> But a booster shot will likely save you from going to the hospital or dying.
You vastly overstate the benefits. I just found the following online calculator that shows the chances of hospitalization based on a number of factors. The paper on which it is based is very much out of date, but I imagine that the latest numbers have not changed by orders of magnitude: https://riskcalc.org/COVID19Hospitalization/
Also, I'm growing sceptical about the effectiveness of the vaccines over time. Just in the past month, I've known EIGHT double-vaccinated people (myself being one of them) who have caught Covid. Statistically, that just shouldn't be possible if the level of protection against symptomatic infection is still around, say, 60%.
That said, I'll get my booster, even if my recent experience has somewhat dimmed my past enthusiasm. I predict that we will soon be talking about a disappointing drop off in booster rates compared to the initial vaccination, as people's own experience will seem to significantly differ from what the press reports. I do hope I'm wrong.
I realize that and rather assumed that it would help my argument. But as the data was old, I didn't feel it appropriate to add speculation on top of it.
About six months after your second Pfizer shot, Israeli data had the effectiveness at about 13% (thereabouts— I have to get to work and don’t have time to look it up right now). The third shot brings it back up to 70, 75% (thereabouts) for delta, because delta is quite different from the OG virus. I read this week an estimate that having your third shot will offer about 30-40% protection against omicron. And that’s of course right after you get the shot. In six months, who knows.
That being said, all indications are that “some” is better than “none” — the cost-benefit still favors getting the third shot, in my view — and I still advise all my friends and family who ask for my opinion on health matters to get the shots.
Good post, especially the Covid part, but this sentence confuses me: “But the alternative — smashing the economy and throwing millions back out of work just to drive inflation down a few percentage points — would likely be even worse.“
Do you mean to imply that raising the interest rate just a little doesn’t increase unemployment? If it doesn’t, that’s (good) news to me and I’m glad to know it. If it does increase (the scourge of) unemployment, then I’m still going to worry that the country at large and the Fed in particular don’t expect there to be full employment, ever, and are comfortable with many Americans being unemployed (as long as it’s not them).
Re: inflation, I think it hasn't been appreciated how much spending growth was undercut by the end of pandemic unemployment in September. That was a very big fiscal contraction, of I think more than 1% of GDP. At the moment it happened to be overwhelmed by a surge in spending of pandemic-related elevated savings, giving us a bizarre phenomenon in October of spending and incomes each making big moves in opposite directions. That had to be fleeting. The fiscal contraction is nevertheless powerful - far more powerful than today's Fed announcements.
I recall Tyler Cowen writing that the Fed would adjust to control inflation because it is the dominant institutional value the Fed needs to preserve, but much of this is accomplished by effective signaling to the markets. It appears Powell is actually quite skilled in this. Time will tell but so far it looks like the markets are reacting as Powell might hope.
Covid has clearly demonstrated failures in our public health system, especially at the CDC. I think we need to acknowledge that there is a lot of territorial infighting in government agencies, especially those not highly valued by the public, which public health certainly is most of the time. Many academic researchers have opined that the mRNA vaccines would always have required a 3rd dose. It seems the CDC is still behind the curve on this.
A major failure is that we don't have widespread, free, rapid Covid tests. I think too many people put their faith in a 2 dose vaccine course essentially allowing life to return to normal. Biden clearly expressed this view. So we didn't use the time to have a far more free rapid testing regime in place. I know someone, about to travel overseas, who paid $850 for the rapid test needed to fly.
The politicalization of vaccination is absurd. An intelligent human gets vaccinated. Period. How to fight the pure stupidity and ignorance of the deplorable's who refuse vaccination is a major problem. I think we have to accept these creatures lack the critical thinking skills that make us human.
Omicron/Delta risk graph - horrible presentation of data. Should reverse the data/graph so that it shows the 95% and 75% protection on the graph vs the 25% and 5%. Should also show the confidence interval for the Delta variant. Any idea of correlation of confidence intervals and asymptomatic infections?
Thanks for mentioning the effectiveness of our institutions. They need all our support.
You emphasis the supply shock as a cause of inflation. However there has been a huge increase in demand as consumer switched spending from services to goods, presumably for pandemic related reasons. Also actual supply has increased. It is really a demand shock.
There was a demand shock too, but that's over, and Fed tightening will reduce demand accordingly.
And the CTC expansion's ending. And the EITC expansion. And the student-loan payment moratorium. I don't think it's an UPWARD demand shock we need to worry about at this point!
Regardless of the balance of supply vs. demand side shock, it does not make sense for the fed to respond by increasing unemployment(raising rates) when the cause is unrelated to an overheated economy. The supply side shock we are looking at is, as you said, caused by changes in purchasing preferences.
I agree. I think the Fed is trying to manage inflation expectations rather than demand.
Glad the Fed didn't raise interest rates...yet. I'm doubting whether they should even be penciling in 3 rate hikes next year, though; the supply-side inflationary factor of crude-oil prices is already down about 15% on its October high, and on the demand side we have expiry of the CTC expansion, the EITC expansion, and the pause on repaying federal student debt (https://twitter.com/MaxKennerly/status/1471118243867906054).
As for Omicron, getting a booster is indeed a sensible and obvious response. More generally, we gotta get low-income countries vaccinated as well.
Shills have rationalized the refusal to waive enforcement of intellectual "property" and to share information and technology with lower-income countries on the grounds that poorer countries lack the ability to manufacture (mRNA) vaccines. That turns out to be false: see https://inthesetimes.com/article/big-pharma-manufacturing-mrna-pfizer-moderna-africa-asia-latin-america and the underlying report at https://accessibsa.org/mrna/. Once again: VAX 👏 THE👏 PLANET 👏👏
For whatever reason, I was truly delighted to see a combined omicron - inflation article. Thanks.
With the pandemic, we have a complete leadership vacuum. Throughout, there’s been a disconnect between what “the experts” are saying and what government says or tries to implement. A pandemic response needs to be coordinated, well communicated, flexible, and above politics, and yet it hasn’t been any of those things. At any given time about half the population is suspicious or resistant, with predictable results.
Combine that with the fact that politicians don’t want to piss off “their” voters, and it’s clear that no one wants to suggest cancelling a second Christmas. If our leaders (“leaders”) all got together and said in unison “This looks really bad; please don’t travel this Christmas; let’s temporarily close schools again till we get through this first big omicron wave,” we might be able to mitigate some of the worst effects.
It’s no surprise to anyone, though, when our politicians continue to fail utterly at their jobs. But now, what I find so alarming is that _even the experts_ whom I’ve come to trust on the pandemic are not freaking out to the extent that I think the situation merits.
Is it burnout from two years of constant bad pandemic news? Are we becoming habituated to millions of people dying? Is it simply the case that human nature being what it is, we really _want_ this to be over and so we’re behaving as if it _is_ over (or at least, proclaiming in unison “we just need to live with it” and going about our business while in denial about the immediate consequences?
It’s very unwise to travel this Christmas and gather in large groups. It’s very unwise to open the schools in January. No one wants to hear it.
Yes, omicron multiplies at incredibly high rates in your bronchi and less so in your lungs, but (1) bronchi are part of your lower (not upper) respiratory tract, ie, they’re really close to your lungs; (2) this can easily progress to pneumonia and destroy your lungs, albeit perhaps more slowly, which remains to be seen, since there’s already a big lag between infection and death, possibly even a bigger lag with omicron; (3) and there’s still the small matter of cytokine storms. If a cytokine storm is your body’s freak-out response to a serious infection, a serious infection with larger numbers of virus makes that response more likely.
It seems to me that we, collectively, are so desperate to minimize what we can see with our own eyes, and we’re so desperate to find some positive spin to justify going ahead with our holiday plans, that we are not fully acknowledging the extent to which this seems _really bad_ and could dwarf the number of deaths we’ve seen so far (not rates, but numbers).
Between HCW burnout and the sheer numbers of patients, health care systems could crash. People are already leaving health care in droves. They just can’t deal with it anymore. Forget about getting a timely cancer diagnosis or needed surgery. Forget about getting a hospital bed for your loved one with a heart attack or stroke. There are ripple effects.
The bottom line with omicron is that it’s new, it’s incredibly fast-moving, and _we just don’t know yet_ what will happen. We just don’t know. But it looks really bad, and yet en masse we seem to be trying to convince ourselves it’s not. This ends badly.
It's about a month now since Omnicron started taking off in South Africa - wouldn't we be seeing notable deaths/hospitalization/ICUS/intubations by now? I know there's a lag in how those can happen, and often a lag in how they are reported (not sure the details of SA) but if cytokine storm are going to start dropping people because of Omnicron, why aren't we seeing that yet out of S Africa?
I think we simply don’t know enough about it yet. There’s a lag of about a month until you see the deaths, so we’ll know more soon. I was just in a meeting tonight at work where the experts-of-experts were cautiously optimistic (or maybe they’re just as desperate as the rest of us to proceed with their Christmas plans and see their families, so they’re all seeing what they want to see). Just kidding… mostly. I hope they’re right.
All I'm seeing from the most recent data and most informed experts is increasingly optimism on Omnicron. A bit cautious optimism, but the caution has been day by day diminishing as the optimism rises. We'll see, there is of course lots of uncertainty, as there is with everything around covid.
That said - uncertainty doesn't always have to mean "close schools / close businesses / shut down travel". There is a cost to all those things and we can't just pay that cost every time there might be a problem. Where the threshold lies between "better safe than sorry" and "crying wolf" is something each person will have a different sense of.
My personal sense is we'd want to be a lot more sure that omnicron is going to be a big deal before doing any of those things. I don't think they buy a lot of time or do much more than flatten the curve a bit, at a cost of fraying society and punishing children of lower income / working class people. I don't see any willpower for a mandated shutdown like in April 2020 unless it was very clearly effective in avoiding, not just delaying, a lot of death and sickness.
I agree that just in the time since I wrote my original comment, there have been reasons for some cautious optimism re the variant. We still don’t know much about it yet.
So Larry Summers is apparently "right" about inflation but almost certainly wrong in its implications. He thought the COVID relief bill was far too large and threatened us with inflation. But let's say that the Fed's actions to taper QE and raise interest rates 0.5-0.75 points work to tame inflation and gradually bring it down to the 3% level or lower, without serious impact on jobs -- a "soft landing" then.
Would then a year or so of somewhat higher inflation have been that damaging? Would Americans have been better off if Summers' advice had been followed and they had received far less financial support back last winter?
No, I'd say that Summers prescription was dead wrong, even if his prediction of inflation was better than most others. That's because (under my scenario) he was dead wrong about the ability of governmental institutions, like the Fed, to adjust and fine tune policy when conditions prove different than expected.
The new Fed policy may not work; inflation may be more intractable than we hope, proving Summers' warnings prescient. But I'm guessing no: we're already seeing inflationary pressures dampening (e.g., the fall in oil prices), and inflation expectations are coming down.
So, I'll give Summers one and a half cheers. But Biden and the Fed three cheers. In this crisis, it was always better to overshoot and be ready to adjust later.
Wasn’t one of the big negatives of covid the long incubation period? If you get sick faster, seems like that’s faster detection -> test -> isolate cycle.
Seems to me like some institutions are functional, and others are extremely dysfunctional. Large chunks of the population are blaming the inflation on Joe Biden and “big government”. And they won’t listen to the fact that the inflation is worldwide and not just in the USA, including at higher rates in countries with much less government than the USA. This is a failure of media and education. The same media ecosystem which thought it would be a good idea to give candidate Trump (who almost all assumed “can’t win”) a gold-played platform in 2026 for ratings. Powell and our scientists sre doing a fine job, but a lot of damage is already done.
Do you think the impact of student loan payments resuming and the child tax credit ending could upend inflation and cause demand to decrease substantially?
I know in my household, which is admittedly unusual, we are planning for a loss of $1,600 a month (combo of increased costs and decreased rev) due to these two factors.
Re: inflation
It is delusional to think the Fed has “tamed” inflation.
Does the Fed increasing interest rates by 0.75% mean workers won’t be asking for 6.8% raises to offset the inflation losses from this past year? Or the 6% they are expecting for next year?
Yet another case of mistaking the stock and/or the bond market for reality.
Spot on, excellent article. Once again you are the mainstream voice of reason and accuracy. Seems like about the only one these days!
I agree with you that the government communication strategy such as it is was bad. I wonder if it has always been this way with medicine except no one ever noticed it because we didn't have insta information via soc media and previously they had more time to get their ducks in line. And no major pandemic like this before.
> But a booster shot will likely save you from going to the hospital or dying.
You vastly overstate the benefits. I just found the following online calculator that shows the chances of hospitalization based on a number of factors. The paper on which it is based is very much out of date, but I imagine that the latest numbers have not changed by orders of magnitude: https://riskcalc.org/COVID19Hospitalization/
Also, I'm growing sceptical about the effectiveness of the vaccines over time. Just in the past month, I've known EIGHT double-vaccinated people (myself being one of them) who have caught Covid. Statistically, that just shouldn't be possible if the level of protection against symptomatic infection is still around, say, 60%.
That said, I'll get my booster, even if my recent experience has somewhat dimmed my past enthusiasm. I predict that we will soon be talking about a disappointing drop off in booster rates compared to the initial vaccination, as people's own experience will seem to significantly differ from what the press reports. I do hope I'm wrong.
This risk calculator predates vaccines entirely.
I realize that and rather assumed that it would help my argument. But as the data was old, I didn't feel it appropriate to add speculation on top of it.
About six months after your second Pfizer shot, Israeli data had the effectiveness at about 13% (thereabouts— I have to get to work and don’t have time to look it up right now). The third shot brings it back up to 70, 75% (thereabouts) for delta, because delta is quite different from the OG virus. I read this week an estimate that having your third shot will offer about 30-40% protection against omicron. And that’s of course right after you get the shot. In six months, who knows.
That being said, all indications are that “some” is better than “none” — the cost-benefit still favors getting the third shot, in my view — and I still advise all my friends and family who ask for my opinion on health matters to get the shots.
Good post, especially the Covid part, but this sentence confuses me: “But the alternative — smashing the economy and throwing millions back out of work just to drive inflation down a few percentage points — would likely be even worse.“
Do you mean to imply that raising the interest rate just a little doesn’t increase unemployment? If it doesn’t, that’s (good) news to me and I’m glad to know it. If it does increase (the scourge of) unemployment, then I’m still going to worry that the country at large and the Fed in particular don’t expect there to be full employment, ever, and are comfortable with many Americans being unemployed (as long as it’s not them).
Re: inflation, I think it hasn't been appreciated how much spending growth was undercut by the end of pandemic unemployment in September. That was a very big fiscal contraction, of I think more than 1% of GDP. At the moment it happened to be overwhelmed by a surge in spending of pandemic-related elevated savings, giving us a bizarre phenomenon in October of spending and incomes each making big moves in opposite directions. That had to be fleeting. The fiscal contraction is nevertheless powerful - far more powerful than today's Fed announcements.
I recall Tyler Cowen writing that the Fed would adjust to control inflation because it is the dominant institutional value the Fed needs to preserve, but much of this is accomplished by effective signaling to the markets. It appears Powell is actually quite skilled in this. Time will tell but so far it looks like the markets are reacting as Powell might hope.
Covid has clearly demonstrated failures in our public health system, especially at the CDC. I think we need to acknowledge that there is a lot of territorial infighting in government agencies, especially those not highly valued by the public, which public health certainly is most of the time. Many academic researchers have opined that the mRNA vaccines would always have required a 3rd dose. It seems the CDC is still behind the curve on this.
A major failure is that we don't have widespread, free, rapid Covid tests. I think too many people put their faith in a 2 dose vaccine course essentially allowing life to return to normal. Biden clearly expressed this view. So we didn't use the time to have a far more free rapid testing regime in place. I know someone, about to travel overseas, who paid $850 for the rapid test needed to fly.
The politicalization of vaccination is absurd. An intelligent human gets vaccinated. Period. How to fight the pure stupidity and ignorance of the deplorable's who refuse vaccination is a major problem. I think we have to accept these creatures lack the critical thinking skills that make us human.
Omicron/Delta risk graph - horrible presentation of data. Should reverse the data/graph so that it shows the 95% and 75% protection on the graph vs the 25% and 5%. Should also show the confidence interval for the Delta variant. Any idea of correlation of confidence intervals and asymptomatic infections?