A Now Hiring sign in Orlando, Fla., April 17, 2021.
Photo:
Paul Hennessy/Zuma Press
The scariest economics paper of 2022 argues that labor markets remain extremely tight, underlying inflation is high and possibly rising, and several years of very high unemployment may be necessary to get inflation under control. The paper is a painstaking empirical exploration by Johns Hopkins macroeconomist
Larry Ball
with co-authors
Daniel Leigh
and
Prachi Mishra
of the International Monetary Fund released by the Brookings Papers on Economic Activity. It shows why the Federal Reserve will likely need to maintain its war on inflation, even if unemployment continues to rise.
Economists use labor market slack to help predict inflation. Typically they look at the unemployment rate, but using the ratio of job openings to unemployment to measure labor market slack offers a clearer picture. Analysts who focused solely on the unemployment rate mistakenly believed the labor market still had substantial slack in 2021 and deemed wage and price inflation transitory. The big burst of inflation that followed left them scratching their heads. Messrs. Ball, Leigh and Mishra find that labor-market tightness itself added 3.4 percentage points to underlying inflation in July 2022.
The paper also argues, convincingly in my view, for a different measure of underlying inflation. Fluctuations in energy and food prices are generally due to factors outside the control of macroeconomic policy makers. Geopolitics and weather have elevated the inflation rate in recent years. Plunging gasoline prices are temporarily lowering the inflation rate now. That’s why economists since the 1970s have focused on “core” inflation, which excludes food and energy.
But food and energy aren’t the only things people buy that are subject to supply-side volatility. Prices of new and used cars, for example, have gyrated over the past two years for reasons that are mostly unrelated to the…
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