Joining the great reshuffle: my new role
Plus some new long-horizon monetary policy prediction markets and #NFPguesses
As already noted on social media, I have left the United States Studies Centre at the University of Sydney to take up a new role with an Australian business advocacy group. A big thank you to former USSC CEO Professor Simon Jackman for inviting me to work on the economic dimensions of the Australia-US relationship at such an extraordinary time in US political history. I will post some longer reflections on my time at USSC when I get a chance. I am still a senior fellow with the Fraser Institute and have some outstanding projects with them that I am in the process of finishing-up.
This newsletter will continue much the same as before, although the content will pivot away from topics that might intersect with my day job. That still leaves plenty to talk about and is in any event more consistent with the way the audience for this newsletter has evolved. As before, nothing you read here should be attributed to current or previous employers. For the journalists who subscribe, I would prefer that you do not quote the newsletter directly or attribute its contents to me. A big thank you also to Brent Donnelly from Spectra Markets who gave this newsletter a mention last week. You can find his newsletter here.
By now, you will have seen the Australian Q1 trimmed mean inflation outcome, which came in two-tenths of a percentage point above our ‘Cleveland Fed model’ at 1.4% q/q and 3.7% y/y, the highest rate for this key series since March 2009. It is the first time the trimmed mean inflation rate has been above the top of the RBA’s 2-3% target range since the September quarter 2009.
The Consumer Price Index (CPI) rose 2.1% in the March quarter 2022 and 5.1% over the year. This is considerably higher than the 1.7% quarterly increase financial markets had been expecting and the highest annual rate since the GST-induced spike in the inflation rate in 2001.
As this chart from Deutsche shows, the March quarter was a record for the breadth of price increases in the overall CPI, although the chart does not normalise for the number of categories, which has increased over time:
It was not that long ago that people were arguing that we were stuck in a low inflation world, that central banks could not generate inflation and that monetary policy was impotent. You’re not hearing that so much anymore, but rest assured, I’ve got receipts!
The trimmed mean inflation rate is an input into our wages model, but the slightly higher than expected print doesn’t change the model’s forecast for the Q1 WPI of 0.8% q/q and 2.5% y/y compared to 2.3% y/y at the end of 2021.
The advance estimate for US Q1 GDP is out and showed a 1.4% annualised decline following a 6.9% annualised increase for the final quarter of 2021. My friends at the Mercatus Centre have updated their NGDP gap, which measures the deviation in the level of nominal GDP from long-run market-based expectations:
Despite the decline in real GDP on the quarter, the gap increased slightly, from 3.1% to 3.4%. As maintained here previously, this is perhaps the best measure of the extent to which US inflation reflects an excess demand problem rather than supply constraints. We have to go back to the third quarter of 2000 to find a larger positive gap (3.6%). The gap implies the US has had an excess demand problem since Q3 2021, which seems right to me. It is why Scott Sumner has been calling for a tightening in Fed policy since then. But the gap also supports his contention that US monetary policy was too tight from the end of 2007 all the way through to the onset of the pandemic.
For those wanting to take a long-run view, Basil Halperin has set-up prediction markets on the forecasting platform Metaculus to help predict what monetary policy will look like over the next 30 years through to 2050. For the background to the markets, see his essay here. This is where those markets stand at the moment:
Because Metaculus is a reputation-based rather than a real money market, it gets around some of the regulatory hurdles to the creation of prediction markets. Fortunately, regulators care less about our reputations than our wallets! While real money markets are preferable in my view, reputation-based markets at least have very low barriers to entry. If there is sufficient interest and I find the time, I will set-up some comparable markets for Australian monetary policy.
US April non-farm payrolls are released Friday next week, with the market expecting a 380k gain in payrolls employment and a steady 3.6% unemployment rate. My models have payrolls at 429k and the unemployment rate at 3.5% (rounded from 3.46% as it happens). At 3.5%, the US labour market will have come full circle back to its pre-pandemic low from January-February 2020. For all the angst about inflation, to get the unemployment rate down from 14.7% to rates otherwise not seen since the late 1960s in just two years following the pandemic shock is no small thing. At worst, our complaint should be that monetary policy works too well. Again, that was not what people were saying in previous years. Fortunately, we’re hearing it less and less. As the Romers once said, the idea that monetary policy doesn’t matter is ‘the most dangerous idea in Federal Reserve history.’
ICYMI
Peter Tulip has a new paper making the case for structural reform of the Reserve Bank of Australia and generously cites some of my work on the topic.
Your tweets: