Ben Bernanke and Olivier Blanchard recently published “What caused the US pandemic-era inflation?” The paper creates a basic model for inflation that is fit to data, and then uses it to attempt to decompose what drove the post-pandemic inflation.
In their conclusions, Bernanke and Blanchard write:
"... as of early 2023, tight labor market conditions still accounted for a minority share of excess inflation. But according to our analysis, if current labor market conditions persist, that share is likely to grow and will not subside on its own. The portion of inflation which traces its origin to overheating of labor markets can only be reversed by policy actions that bring labor demand and supply into better balance."
That sounds to me as if they're saying, "In this round of inflation, we haven't been able to pin the blame on those greedy workers *yet*, but that won't stop us from trying to do so going forward."
"prices set by firms as a markup over projected expenses."
One problem I see with this, classical, mark-up theory of price setting is that it's assumption is that the expenses are the major factor of production, upon which the mark-up rides, whereas one might well treat expenses as just an input to production, with the the mark-up as the main influence on prices.
Then, on labor: But labor is just another input among many to production. Focusing solely on one factor of production takes us off course.
Wages are the major domestic input to production (particularly for the US) - other inputs are outputs of other firms. Energy prices are set globally - but have their own shock within the model.
Ah, that's interesting: bare inputs versus inputs that are also outputs. Interesting. So that's the whole story on the weight put exclusively on labor. Hmm.
In their conclusions, Bernanke and Blanchard write:
"... as of early 2023, tight labor market conditions still accounted for a minority share of excess inflation. But according to our analysis, if current labor market conditions persist, that share is likely to grow and will not subside on its own. The portion of inflation which traces its origin to overheating of labor markets can only be reversed by policy actions that bring labor demand and supply into better balance."
That sounds to me as if they're saying, "In this round of inflation, we haven't been able to pin the blame on those greedy workers *yet*, but that won't stop us from trying to do so going forward."
They use the model to argue that v/u has to fall for inflation to go back to 2%. So either unemployment up, or openings fall (reduced demand).
Thanks Brian. Looks like B & B now known as Double B have given this issue a little more thought than usual. My hunch is that Blanchard is moving much
closer to economic reality than Bernanke.
"prices set by firms as a markup over projected expenses."
One problem I see with this, classical, mark-up theory of price setting is that it's assumption is that the expenses are the major factor of production, upon which the mark-up rides, whereas one might well treat expenses as just an input to production, with the the mark-up as the main influence on prices.
Then, on labor: But labor is just another input among many to production. Focusing solely on one factor of production takes us off course.
Wages are the major domestic input to production (particularly for the US) - other inputs are outputs of other firms. Energy prices are set globally - but have their own shock within the model.
Ah, that's interesting: bare inputs versus inputs that are also outputs. Interesting. So that's the whole story on the weight put exclusively on labor. Hmm.
Typo
inflation, that would be embedded in the markup factor, and would thus captured by the supply chain shock.
...thus BE captured by
Thanks.