Krugman Says ‘Inflation Really Looks Like Yesterday’s Problem’ As He Points To A Metric That Is Harbinger Of Fed Rate Cuts – iShares TIPS Bond ETF (ARCA:TIP)

Inflation May be a Thing of the Past, Says Economist Paul Krugman

The latest consumer price inflation report for December may have slightly exceeded expectations, but economist Paul Krugman believes that pricing pressure could soon become a thing of the past. In an opinion piece for The New York Times, Krugman stated, “Inflation is over,” downplaying the significance of the inflation numbers.

While some viewed the report as evidence that disinflation has stalled, others found reasons for optimism. Krugman noted that those who had previously warned about the difficulty of bringing down inflation seemed to be the most pessimistic about the current situation.

Krugman also pointed to the producer price inflation report released on Friday, which he described as “unanimously good.” He highlighted the importance of this number in predicting the personal consumption expenditures deflator, a monthly indicator that influences the Federal Reserve’s policy. The decline in the two-year interest rate following the producer price inflation data further supports Krugman’s argument that inflation is no longer a major concern.

According to Krugman, it now appears that the Fed’s preferred measure of underlying inflation will be below the 2 percent target on a six-month basis. This suggests that inflation may not be a pressing issue going forward.

Krugman belongs to the “Team Transitory,” a group of economists who believe that inflation is driven by temporary factors rather than long-term trends. However, there are others who believe that inflationary pressures could return in full force.

Gold bull and economist Peter Schiff, for example, argued that the hotter-than-expected December inflation does not mean that the Fed has to fight harder to win the inflation war, but rather that it has already lost. The fear of rising inflationary pressure led the central bank to raise interest rates in 2022, but as inflation subsided, the Fed began to pause.

Federal Reserve Chairman Jerome Powell and other officials have consistently stated that future monetary policy will depend on the trajectory of inflation. However, Krugman’s analysis suggests that inflation may no longer be a significant concern, which could have implications for the Fed’s decision-making process.

The iShares TIPS Bond ETF (TIP), an exchange-traded fund that tracks the performance of inflation-protected U.S. Treasury bonds, ended the day up on Friday. This indicates that investors may be reacting positively to Krugman’s assessment that inflation is no longer a major threat.

While opinions on inflation may differ, Krugman’s argument offers a contrarian perspective that challenges the prevailing narrative of sustained inflationary pressure. As the economy continues to recover from the pandemic, it will be crucial to monitor inflation trends and their potential impact on monetary policy and financial markets.

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