![]() So holding back the recovery would have been a serious mistake if - and it’s a big if - the inflation spike of 2021 doesn’t turn into a wage-price spiral, and we can eventually get inflation back down without having to go through a serious recession. High unemployment isn’t just harmful when it’s happening it also has destructive long-term effects, because the evidence says that young people starting their work lives amid economic weakness suffer persistent damage to their earnings. That is, unless policymakers have access to some magic wand I haven’t heard about, we could have kept 2021 inflation down only at the cost of a substantially slower jobs recovery.Īnd that would have been a bad thing. Well, I don’t see any way we could have squeezed service prices without also squeezing service-sector employment. This relative inflation in the prices of goods as compared with services was unavoidable if we didn’t want to experience crippling shortages - which we did, in fact, avoid: some consumer items have been hard to get, but predictions of a holiday-season “ shipageddon” didn’t come true.īut we could have had lower overall inflation if we had squeezed service prices - say, by slashing aid to families or raising interest rates, and thereby restraining private spending - instead of doing what we did, which was to make the whole adjustment via higher goods prices. Sure enough, the ratio of the price index for durable goods to that for services has risen substantially, reversing its normal technology-driven downward trend. ![]() Real purchases of consumer durables are still running more than 20 percent above the prepandemic level, while purchases of services have only recently returned to their level of two years ago.Īnd supply chains have had a hard time keeping up with surging goods purchases.Įcon 101 tells us what should happen in the face of skewed demand and constrained supply: The prices of the things people are scrambling to buy should rise relative to the prices of things people are still shunning. Fear of infection has limited demand for in-person services like restaurant meals, and people have compensated by buying physical goods like cars and household appliances. ![]() Let’s start with what should be an unobjectionable point: The Covid-era recovery has been very unbalanced. I can already hear the screaming, but bear with me for a bit. ![]()
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