Supply Chains, Demand and Inflation

Chief Economist Scott Brown discusses current economic conditions.

You can learn a lot by talking to people. The economy is “strong,” but also “terrible.” Higher inflation is “transitory,” but also “likely to persist.” Fed policy is “behind the curve,” but also “appropriately positioned.” In truth, the outlook for growth, inflation, and monetary policy is evolving.

The University of Michigan’s consumer sentiment survey currently shows an odd mix. Consumers generally feel good about their own personal finances, but they also think that the overall economy is doing poorly – worse, in fact, than during the April 2020 shutdown. There is always a political split in the sentiment survey results. Republicans currently rate the economy much lower than Democrats, just as Democrats rated the economy lower when Trump was in the White House. However, those of both parties (and independents) currently rate the economy poorly. Higher inflation is a big part of this. People hate inflation.

The argument for transitory inflation – Nonfarm payrolls are still down by more than four million since the start of the pandemic and we would have likely added more than three million jobs over the last 20 months if not for the pandemic. That’s a lot of slack. The unemployment rate was 4.6% in October, but we learned in the last cycle that labor supply is a lot more flexible than the unemployment rate would suggest. Higher consumer price inflation has been concentrated in restart pressures. Supply chains are slow to recover after every downturn. It’s a matter of time before they clear up. Long-term inflation expectations remain well anchored. Demand was boosted by large-scale fiscal support in 2021, but we won’t see federal checks and deposits or extended unemployment benefits in 2022. Household savings increased during the pandemic, but excess savings will be depleted over time.