Accidental rise in prices – Newspaper Kommersant No. 202 (7403) of 10/31/2022

One-time inflation bursts in modern conditions are a much more complicated story than random price increases. An analysis of more than 100 episodes of such surges, conducted at the University of Michigan, showed that due to their subsequent connection with inflationary expectations, the effect fades on average within three to four years, three times longer than the episode of inflationary growth proper. The proposed method of dealing with this is simple, understandable and therefore difficult to apply in reality.

A study by three University of Michigan economists—André Blanco, Pablo Ottonello, and Teresa Ranosova—published in the NBER Preprint Series: The Dynamics of Major Inflationary Spikes examines macroeconomic changes in most major inflationary “bursts” (the right side of the distribution, averaging five percentage points and above) over the past 30 years, we are talking about short-term, less than one year, periods of one-time rapid price growth due to random factors. Most of the episodes recorded in the study are the economies of developing countries, the median level from which there was a “splash”, which, among other things, was identified through massive errors of professional economists in national markets (55 countries) in inflation forecasts, was 3.7% of the growth of the index consumers year on year.

In most cases, the pattern of behavior of inflation during “bursts” in the medium term on the charts looked like an “inverted tick” (appeal to the Nike logo) – a rapid increase in inflation is followed by an average threefold period of exhaustion of the effect, disinflation. The authors, following the majority of economists, attribute what is happening to the impact of inflationary expectations on inflation – “bursts” cause “unanchoring” of expectations quite reliably. At the same time, long-term (over a five-year horizon) inflation expectations of the population grow much less than short- and medium-term ones (on average, by 0.3 percentage points at a peak that coincides with the peaks of short-term expectations), but this increase is more stable. The dynamics of annual inflation itself has two peaks: the second, which is much weaker than the first, on average lags behind the first by four to five quarters. The authors note that this picture differs from the situation before 1990, when bursts were accompanied by a constant increase in inflation. Central banks (mostly regulators using inflation-targeting models) and fiscal agencies tend to react to what is happening only after a second, smaller peak in expectations, while monetary policy-related unemployment rises as a result of a large “splash” two or three blocks after the first peak.

The authors’ recommendation is unequivocal: do not wait for the second peak, aggressively resist the “splash” and the associated losses in welfare in the economy and in GDP by rapidly raising the Central Bank’s rates and fiscal consolidation. The reasons why they do not do this are also obvious: these are political risks and the slower than required speed of the work of state apparatuses.

Dmitry Butrin