The models that economists have long relied on to analyze inflation have broken down since the coronavirus pandemic began.
In terms of news about the economy and inflation, this is a big week. On Tuesday and Wednesday, Jerome Powell and his colleagues at the Federal Reserve will hold a two-day meeting, at which they are expected to raise the federal-funds interest rate another three-quarters of a percentage point. On Thursday, the Commerce Department will release its initial estimate of G.D.P. growth in the three months from April to June.
Of course, the answer is inflation, which rose to 9.1 per cent in June, the highest rate in more than forty years. Having failed to predict the global surge in prices that began last year, central bankers worldwide are egging each other on to raise interest rates sharply. Last month, the Fed hiked the federal-funds interest rate by three-quarters of a percentage point. Earlier this month, the Bank of Canada one-upped its American sibling by raising its benchmark rate a full point.
Powell may well welcome these developments this week, but he’s also likely to say that it’s too early for a change of course. Despite the recent letup in oil prices, the Fed chair and his foreign counterparts fear that inflation may be getting out of control—the very thing that independent central banks, like the Fed and the E.C.B., were set up to avoid.
To his credit, Powell has publicly admitted the scale of the challenge that he and his colleagues are facing. At the forum in Portugal, he pointed out that the economic models they have long relied on to analyze inflation—principally the Phillips curve, which connects high inflation to low unemployment—have broken down since thebegan. “I think we now understand better how little we understand about inflation,” Powell admitted.
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