Fed Chairman: ‘We Now Understand Better How Little We Understand About Inflation’
Stock photo monetary policy.
JNemchinova via Getty Images

Federal Reserve Chairman Jerome Powell has reflected on why the economic experts failed to predict surging inflation, and his findings didn’t exactly imbue much confidence in those who heard them.

During the European Central Bank forum, host Francine Laqua asked panelists, “Hindsight is a beautiful thing, I know…but going forward…how do we need to look at inflation differently? So, for example, in the U.S. — the stimulus. Did we circulate the impact this would have on inflation?”

“I think we now understand better how little we understand about inflation,” Powel responded.

The Bloomberg TV anchor responded with a chuckle, “That’s not very reassuring.”

“No, honestly, this was unpredicted. I was looking at the time of our June meeting one year ago, of the 35 people who filed with a survey of professional forecasters, 34 of them had inflation below four percent for the last year. And of course, it was way above four percent.”

The exchange can be seen here:

Powell also clarified that experts were using an outdated model to predict inflation.

“So really, everyone had the same model — which was the Phillips curve model — and it just was not capable of producing high inflation. But what it was missing was something that’s been completely missing in the data for 40 years, which is basically the collapse of the supply-side.”

“You know the U.S. economy is famously adaptable… and yet here they are,” he continued. “So, what you had was very strong demand, but hitting effectively a vertical supply curve. So ordinarily when people want to buy cars — which they really did, because they didn’t want to ride on public transportation, rates were low, they had all these savings — the car companies would make more cars and they might raise prices, too. In this case, they couldn’t make as many cars so what you got was, straight up the vertical supply curve, a big price increase.”

Powell theorized that the process could happen in reverse and help lower inflation.

The Consumer Price Index (CPI) rose 8.6% between May 2021 and May 2022, meaning that inflation surpassed record highs, according to the U.S. Bureau of Labor Statistics. President Joe Biden has blamed COVID-19, Russian President Vladimir Putin’s invasion of Ukraine, MAGA-Republicans in Congress, and energy companies for soaring costs of goods.

While inflation is a global problem, data from the Organization for Economic Cooperation and Development (OECD) shows that the United States boasts higher inflation rates than many other developed countries. The 8.3% inflation rate seen in the United States as of April was higher than the 7.8% rate in the United Kingdom, the 7.4% rate in Germany, the 6.8% rate in Canada, the 6% rate in Italy, the 4.8% rate in South Korea, and the 2.5% rate in Japan.

Powell’s comments in full can be seen here:

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The Daily Wire   >  Read   >  Fed Chairman: ‘We Now Understand Better How Little We Understand About Inflation’