MNI INTERVIEW: Inflation Looks To Be Stabilizing-Fed Economist

U.S. inflation appears to be showing less volatility in a promising sign for the Federal Reserve’s battle to rein in price pressures, Richmond Fed economist Alexander Wolman told MNI.

Wolman has devised a new way of measuring inflation variance: tracking the monthly inflation rate against the share of relative price changes in particular goods or services. In other words, he examined how swings in the cost of individual items in the PCE basket like gasoline or furniture relate to the overall movement of consumer prices.

That relationship was quite regular in the period between 1995 and 2020, so he used that time horizon as a benchmark for measuring post-Covid shifts. In the first year of Covid the relationship held, but things began to diverge starting in early 2021, he said. Wolman's work showed that inflation was running ahead of what might be expected based on the pattern of large swings in relative prices.

The figures have taken an encouraging turn lately, he said. “In more recent months, fingers crossed but it looks like we’re back to the kind of relationship between monthly inflation and the share of relative prices changes that we saw pre-Covid. The last four months of data look pretty close to pre-Covid data,” Wolman said. (See MNI POLICY: Softer Trend Inflation Boosts Case For Fed Pause)

The behavior of inflation since the pandemic remains important for policymakers worldwide. Central bankers including at the Fed were surprised at the price surge following Covid lockdowns, and after what some investors called a delayed response officials embarked on the most aggressive tightening in decades. Fed Chair Jerome Powell said Thursday he sees good progress toward restoring price stability and the Fed is "proceeding carefully" on policy decisions, but warned that persistently above-trend growth could require further tightening.

THE REAL POLICY SHOCK

Wolman pushed back against the notion that the Fed’s aggressive monetary tightening starting in March 2022 represented a policy shock, arguing instead that the real shock was the expansionary stance the FOMC expressed in the first policy statement following the 2020 change in the Statement of Long-Run Goals.

“In the post-Covid episode, I see the change in the FOMC statement in September of 2020 as being a really central, fundamental change in policy. It said the FOMC planned to keep rates at the lower bound until inflation was back above target and we had something like full employment – to me that was a really radical change in policy,” he said.

Luckily for the Fed, U.S. inflation expectations were sufficiently well-anchored before the surge in prices that they have remained contained despite the two-year inflationary spurt, he said.

“At least at the moment it seems like we’re going to be able to have followed through on that extremely expansionary policy without losing long-run credibility,” Wolman said.