We estimate that the lingering impact of heightened COVID-era delivery times explains up to 70 percent of elevated core inflation in Q4 2022. We show that lagged effects from COVID-era supply chain disruptions were still an important driver of elevated inflation in 2022, likely because price adjustments to changing supply conditions take time. In this paper, we argue that central banks should generally move slowly in combatting inflation when the sources of that inflation are ambiguous (such as in the aftermath to a pandemic), when long-term inflationary expectations remain well-anchored (as they have), and inflation is not overly excessive (e.g., when it is below a double-digit range on an annual basis). The lags with which various forces drive inflation are highly uncertain, and the risk of inflation becoming embedded when it is above target (the argument for moving faster) can be outweighed by the risk of “breaking things” (the argument against moving faster), especially when inflation remains in the single digits. We present new empirical evidence on one particular source of lags in the inflation process: lingering effects from supply chain disruptions at the height of COVID. The COVID Inflation Shock, Monetary Policy Gradualism, and Lingering Supply Chain EffectsĪbstract: Monetary policymakers face difficult tradeoffs when inflation is above target. The full paper (except the exhibits) is posted below and available here (with exhibits). Should further tightening from the Fed be needed, there will be ample time to shift back into hiking mode, given that inflation expectations have not displayed discontinuous moves during the pandemic or in the years before. The impact of lags in monetary policy, tighter fiscal policy, and the evolving banking crisis also all point toward a “wait-and-see” approach to further hikes. The upshot is that the normalization of supply chains will continue being a disinflationary force in 2023. Our core argument is that when inflation remains in single digits (admittedly a qualitative judgement rather than an empirical one), when the sources of inflation are ambiguous (such as following the pandemic), and when long-term inflationary expectations remain well-anchored (such as they have), going gradually on tightening is better than going faster. Furthermore, we present new empirical evidence that there are lags in the empirical relationship between inflation and stretched delivery times, with between 30 and 70 percent of elevated core PCE inflation towards the end of 2022 still attributable to lingering supply chain effects. I have a new analysis coming out on this topic with Robin Brooks of the Institute for International Finance. GSSE transfers do not directly alter producer receipts or costs or consumption expenditure.In the face of high inflation, how quickly should monetary policymakers move to a given terminal rate? Going rapidly may help bring inflation down more quickly. But going rapidly also can pose higher adjustment costs, since going faster can "break things." The evolving banking crisis may at least in part be an example of the latter phenomenon. GSSE include policies where primary agriculture is the main beneficiary, but does not include any payments to individual producers. GSSE transfers are linked to measures creating enabling conditions for the primary agricultural sector through development of private or public services, institutions and infrastructure. If negative, the CSE measures the burden (implicit tax) on consumers through market price support (higher prices), that more than offsets consumer subsidies that lower prices to consumers. CSE transfers from consumers of agricultural commodities are measured at the farm gate level. PSE transfers to agricultural producers are measured at the farm gate level and comprise market price support, budgetary payments and the cost of revenue foregone. TSE transfers represent the total support granted to the agricultural sector, and consist of producer support (PSE), consumer support (CSE) and general services support (GSSE). Agricultural support is also expressed in monetary terms, in million USD and million EUR. This indicator includes the total support estimate (TSE), measured as a percentage of GDP, the producer support estimate (PSE), measured as a percentage of gross farm receipts, the consumer support estimate (CSE), measured as a percentage of agricultural consumption, and the general services support estimate (GSSE), measured as a percentage of total support. Agricultural support is defined as the annual monetary value of gross transfers to agriculture from consumers and taxpayers arising from government policies that support agriculture, regardless of their objectives and economic impacts.
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