“I was wrong” is not something you expect to hear from an economist. When they are wrong, economists are far more likely to push the reason for them being wrong onto things totally unforeseeable, or Donald Trump, or bad data coming from outside sources. Well, last Thursday, an economist admitted that he, and others, got things way, way wrong!

What economists like me got wrong about inflation

Predicting an end to inflation now comes down to three factors: the pandemic, Russia’s war in Ukraine, and decisions by the Federal Reserve.

by Mark Zandi | Thursday, June 23, 2022

If you are like most Americans, your number-one financial problem these days is runaway inflation. You’re desperate to know when inflation will peak, and when it will be back down to a level you can live with.

The economic pain and suffering caused by more than a year of spiking in inflation — which has dramatically raised prices on everyday goods and services — has been tough to bear. The typical family must shell out $460 more a month to buy the same items and services they bought a year ago — a huge bite out of that family’s $70,000 in annual income. For lower-income households living paycheck to paycheck, this is unmanageable.

Prices are up a lot for almost everything, but most disconcerting are the big price increases for basic staples. The nationwide cost of gasoline has soared to a record near $5 per gallon, nearly all items on grocery store shelves have suddenly become much more expensive, and rents are increasing at a double-digit pace.

I’ll admit it: it was so gratifying to see the “We were wrong” subtitle that I just had to screen capture it!

Many of us have never seen this kind of inflation before, making it especially difficult to fathom. The last time inflation was so high was two generations ago when Ronald Reagan was president. And it comes on the heels of more than a decade of inflation so low that the Federal Reserve, whose job it is to manage inflation, worried it was too low for the economy’s own good.

Also irksome is how wrong the Fed, the Biden administration, and economists, including me, were in thinking that the high inflation would quickly recede. It hasn’t.

I’m old enough that I have seen inflation this high, and much higher, from the last year under Gerald Ford, — and yes, I remember President Ford’s “Whip Inflation Now” buttons — all through Jimmy Carter’s abysmal presidency, and into the first year of the Reagan Administration. I also remember what finally did ‘whip’ inflation: a deep recession in 1981 and 1982.

Mr Zandi continued to blame the COVID-19 panicdemic, and he’s right, but he’s also wrong. It was the response by governments, in the United States and around the world, to the virus that fried the economy. He blames workers continuing to stay home, having dropped out of the economy because they are afraid of the virus, but that fear was driven by governments’ messages of panic. Even now the message is being spread, at least by the media, that there are new sub-variants of the Xi Omicron variant, which “appear to escape antibody responses among both people who had previous Covid-19 infection and those who have been fully vaccinated and boosted.” That, coupled with the unprecedented government largess with borrowed money, have worked to keep people who should be working out of the job market. It isn’t as though serious inflation wasn’t predicted due to the government borrowing so much money! Production and supply chain disruptions caused by people not being on the job, and they are not on the job because the government has enabled them to survive without working, has to lead to inflation: they have money to spend, but fewer things on which to spend it, which drives up prices; the laws of supply and demand are not subject to government revision!

Naturally, Vladimir Putin has to be blamed, for invading Ukraine. The European Union decided to stop buying oil from Russia, which meant that they had to buy it elsewhere, putting a large increase in demand on the remaining supply. Despite the pleas of the global warming climate change emergency activists, people need fossil fuels now, to the point where very, very green Germany is going to reopen coal fired power plants to meet electricity demands.

Of course, Europe also needs natural gas, so the energy companies have found a fig leaf of cover to keep buying gas from Vladimir Vladimirovich! Soviet Russian troops in Ukraine is far less important than keeping the lights on in Europe! Remember: we told you that even before the invasion.

Mr Zandi, chief economist of Moody’s Analytics, continues to tell readers who the high prices for oil are so pernicious in the economy, but somehow, some way, he missed the fact that the price of oil is not that high. What really happened is that the price of oil came down pretty dramatically, as oil producers, Russia especially, dumped a lot of oil onto the market, which brought prices down dramatically. This persisted for several years, resulting in the new, lower costs for oil being priced into the market, and when prices shot back up, quickly, it produced a shock in the economy.

In 1980, the average price of 87 octane regular gasoline in the United States was $1.19 per gallon. Using this inflation calculator, gasoline should have cost $3.74 per gallon in 2020, but it was $2.17 per gallon, and had, on April 27, 2020, dipped to $1.77.

The same inflation calculator puts that 1980 price at $4.22 per gallon now, but that includes the inflation caused by oil price increases itself, so is of somewhat limited value. Nevertheless, regular gasoline prices, while somewhat higher than $4.22 per gallon right now, are not extraordinarily higher; they’re still in the $4.00 to $5.00 range, albeit higher in that range. At the station closest to me, regular gasoline id $4.56 per gallon, having come down from $4.80 a couple of weeks ago.

Mr Zandi, having admitted that he, and many others, were wrong, now gives us a new projection:

1. if the panicdemic pandemic continues to “wind down”; and
2. if “the worst of its economic fallout” from the invasion of Ukraine is already at hand; and
3. if the Federal Reserve “successfully calibrate(s) monetary policy”;
4. then “the odds are good that inflation is peaking and soon will moderate to a level we can be comfortable with.”

So, what does all of that mean? It means that governments have to abandon their idiotic responses to COVID-19, and let us just live with it, which is what most of us in the United States have already done. I did notice that, in the Tour de Suisse bike race, the Swiss had abandoned the face masks that I had seen in the Giro d’Italia. The riders don’t wear masks while competing, of course, but previously everyone was masking up at the celebrations at the ends of each stage.^[1]These European bike races are our vicarious vacations, enjoying the scenery even if we can’t be there. The Tour of Norway was particularly spectacular.

It means that, sorry to say it, Russia must carry on and win its war against Ukraine in some acceptable fashion, without the United States and NATO doing something to intervene more thoroughly and prolong, and perhaps intensify, the war. Russian oil and natural gas must come to back to the market and the ‘normal’ order of things be restored.

And it means that the Federal Reserve has to get everything right. Anyone here want to bet €10 on that?

Inflation will be whipped the same way it was in 1982, by a significant recession. The economy already contracted 1.4% in the first quarter of this year; if it contracts again in the second quarter, which ends this month, we will officially be in a recession . . . again.