Saturday, April 11, 2020

The Coming Acceleration in Price Inflation in the Post COVID-19 Economy

Several versions of the following question have come in:
If people are getting a $1200 check, when they are used to getting $5000, how can strong price inflation be an issue?
I am not sure those making this argument are aware that they are making the debunked Phillips curve argument that higher unemployment means less price inflation.

Murray Rothbard discussed the problem with this view in relation to the economic environment of the 1970s:
In the last two or three decades, in short, both inflation and unemployment have increased sharply and severely. If anything, we have had a reverse Phillips curve. There has been anything but an inflation- unemployment tradeoff.
What forecasters are missing here is focusing on the people who don't have money, but I rush to add it is questionable whether all who are unemployed will be getting less from the government than if they were employed (SEE: Casey B. Mulligan). But let's assume all the unemployed are getting less money, a lot less, than when they were working. It means nothing relative to price inflation. The Phillips curve is a myth. What you have to look at is if the money supply is increasing at a significant rate and if it is, you have to realize someone is getting the money and, thus, there is more money to be spent.

If those who are getting the money are willing to spend, providing there is no strong productivity gains, you will see accelerating price inflation. If you don't recognize this possibility you are denying the possibility of stagflation, that is, accelerating price inflation and high unemployment.

I emphasize once again, I expect gains in the prices of goods and services that people are buying not in sectors where the COVID-19 panic has changed consumer desires, so at first, you may not see the increases in government reported price indexes. But the price inflation will register with consumers in their seeing the goods and services they are buying going up.



  1. Do you also expect to see price controls and what will the effects of those be? How about 'excess profits taxes' ? The political environment is going to turn even more insane, no?

    1. As corporate medias lead economist Krugman's endorsement of price controls is foreshadowing.

      Tax revenues will follow taxable profits/income. With Lockdown-20 I don't see how tax revenues wont take a hit without adjustments to taxation.

  2. Federal Reserve is now essentially God financially, so ask is whatever they want and decide to do.

  3. Bob, with all due respect, this has nothing to do with the Phillips curve or Murray's criticism of it. I think that you are missing the point that some of us are making. The point is this: Is the new money a net addition to total cash balances (and therefore likely to be spent) OR does the new money simply replace expectations for additions to cash balances that never occurred because of the shutdown? My wife, a part-time yoga instructor, is "down" $1,200 because of the shutdown and feels poorer because that income never materialized. Now she gets her $1,200 check from the Treasury. How is that restoration on balance "inflationary" especially since it's a one-off presumably? It's even "worse" than that since the more likely situation is that the printing press money nowhere near replaces the lost income of millions of full-time workers who have not had income for weeks. (And they are drawing down their cash balances to live). Further, it is extremely doubtful that the new money will reverse the negative wealth effects associated with IRA, stock market and real estate value losses. So, on balance, unless you can show that the free money from the Fed dramatically changes overall societal cash balances, the case for any general price inflation is still problematic.


    Bob....could you explain why JP Morgan sees a 40% possible decline in GDP, and not a smidgen of inflation in their forecast, but you do?