Robin J Brooks argues that economic slack across major economies makes a broad inflation scare unlikely, challenging market expectations for a more hawkish Federal Reserve after a U.S. consumer price reading he called hot.
In a Nov. 12 post, Brooks compared real gross domestic product (GDP) with two benchmark paths. One extends the pre-2008 trend growth rate through the years after the global financial crisis; the other shows where output would be if its pre-COVID trend had continued.
Against the pre-COVID path, Brooks put U.S. output 1% lower, the euro zone 5% lower, the U.K. 7% lower and China 10% lower. He said Canada was at potential. Japan was slightly above that level, but he considered its stagnant output unlikely to fuel inflation.
Brooks argues that an oil cost shock is more likely to spread through consumer prices when strong demand gives businesses room to pass costs on. In his view, the GDP comparisons show little broad demand pressure across the economies in his charts.
He linked a recent shift toward a more hawkish Fed outlook to a speech by Fed Governor Waller and a consumer price reading he described as hot. Brooks said Brent crude had fallen more than 20% in November while the dollar had risen sharply. Brooks linked the latest U.S. inflation reading to the earlier rise in oil costs.
That view differs from the case for gradual rate increases made by Thomas Hoenig, a Mercatus Center senior fellow and former Kansas City Fed president. In an Oct. 28 interview with David Lin, Hoenig said inflation near 4% left little inflation-adjusted restraint against the Fed’s 2% goal. EconoTimes previously covered Hoenig’s argument for gradual rate increases.
