Comparing Two Predictions of Inflation

On February 17, 2021, economist David Beckworth and columnist Ramesh Ponnuru, in an op/ed titled “Stop Worrying about Inflation,” wrote:

Hence the new round of inflation hand-wringing. The Harvard economist Lawrence Summers raises the prospect of “inflationary pressures we have not seen in a generation, with consequences for the value of the dollar and financial stability.” Olivier Blanchard, the former chief economist for the International Monetary Fund, warns that we risk not just “overheating” the economy but “starting a fire.”

They should relax. The evidence that high inflation is on the way is weak. It’s too weak, actually: An economy on the verge of a robust recovery would be showing more signs of rising inflation. Right now, inflation appears more likely to stay below its optimal level than above.

And what, in their view, was the optimal level of inflation? They don’t say, but it appears from context that they think it’s 2 percent annually.

On May 20, 2021, I wrote:

I would put an 80 percent probability on the prediction that before the end of 2022, there will be at least one twelve-month period in which the CPI has risen by at least 5 percent. I would also estimate less than a 20 percent probability that in the same time period, there will be a twelve-month period in which the inflation rate hits Carter-era 10 percent.

Between May 2021 and January 2022, the Consumer Price Index, seasonally adjusted, rose from 268.6 to 281.9, an increase of 4.9 percent.  So my 80 percent bet is virtually certain to be correct. I also don’t think there will be a 12-month period before December 2022 in which inflation hits 10 percent.

How about the Beckworth/Ponnuru prediction? Way off.

Now, to be sure, a better measure of inflation, as I’ve always pointed out, is the Personal Consumption Expenditure index. Beckworth and Ponnuru point out that it tends to grow more slowly than the CPI. So let’s look at that number. Between May 2021 and December 2021, it rose from 114.8 to 118.7, an increase of 3.4 percent. So, while I had in mind the CPI for my prediction rather than the PCE, I think my prediction of 5 percent will come about for the PCE by the end of the year also.