Inflation and the scariest economic paper of 2022


Scariest economic paper of 2022 says labor markets remain extremely tight, core inflation is high and possibly rising, and several years of very high unemployment could be needed to get inflation under control . The paper is a careful empirical exploration by Johns Hopkins macroeconomist Larry Ball with co-authors Daniel Leigh and Prachi Mishra of the International Monetary Fund published by the Brookings Papers on Economic Activity. This shows why the Federal Reserve will likely have to maintain its war on inflation, even if unemployment continues to rise.

Economists use the slowdown in the labor market to help predict inflation. Typically, they look at the unemployment rate, but using the vacancy-to-unemployment ratio to measure the labor market downturn provides a clearer picture. Analysts who focused only on the unemployment rate mistakenly believed that the labor market still had a substantial slowdown in 2021 and deemed wage and price inflation transitory. The big surge in inflation that followed left them perplexed. MM. Ball, Leigh and Mishra find that the tight labor market itself added 3.4 percentage points to core inflation in July 2022.


Wj

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