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The Second Great Experiment Update

John Cochrane The Grumpy Economist

Date Posted:: November 11, 2022

.@johnHCochrane argues that inflation potentially peaking with the Federal Funds rate < CPI is evidence that the fiscal theory of the price level is the right way to understand inflation

The news of the moment is that inflation might--might--be peaking. I just present the CPI to make the point, but there seems to be a lot of news suggesting that inflation is easing off. Newer theory, which primarily uses rational (better, forward-looking or model-consistent) rather than adaptive expectations, says that inflation is stable under an interest rate target. It follows that inflation can go away all on its own, even with interest rates substantially below inflation. With fiscal theory + rational expectations, we are having a burst of inflation to devalue government debt, as a response to the 2020-2021 fiscal blowout. But once the price level has risen enough to bring the real value of debt back, it’s over. Until the next shock hits. If inflation fades away despite interest rates below the inflation rate, we have a rather striking confirmation of this rational expectations view, with stable inflation, relative to the traditional spiral-away view. So, are we headed there? It’s too soon for this cautious commenter to declare victory, but I am willing to provide context and say I’m watching anxiously!

Takeaways by Macro Roundup^® AI

CPI data suggest inflation might be peaking, with other news pointing to inflation easing, though the author says it is too soon to declare victory.
Under rational, forward-looking expectations, inflation is stable with an interest rate target, so inflation can fade on its own even when interest rates sit substantially below the inflation rate.
Fiscal theory combined with rational expectations frames the inflation burst as a response to the 2020–2021 fiscal blowout that devalues government debt, ending once the price level has risen enough to restore the real value of that debt.

Demand-Driven Inflation

Domenico Giannone and Giorgio Primiceri Bookings Papers on Economic Activity

Date Posted:: October 1, 2026
Is Database:: Database

Giannone and Primiceri revisit the relative role of supply vs. demand shocks in generating the post-Covid inflation. Because aggregate demand curves estimated from pre-pandemic data are flat, supply shocks alone would not have generated large inflation in the absence of added demand stimulus.

Demand and supply curve slopes are estimated from pre-pandemic data using the essentially definitional restriction that supply shocks move prices and output in opposite directions along demand curves, while demand shocks move them together along supply curves; the plotted slopes represent Bayesian posterior medians rather than uniquely identified estimates. The estimated demand curves are relatively flat in both the US and euro area [Figure 7], reflecting the central banks’ strong pre-pandemic responses to inflation. With those slopes, adverse supply shifts cause large output losses but comparatively little inflation. [To successfully explain] the combination of inflation and output observed in 2022 therefore requires demand to shift outwards too. Strong demand, including unusually accommodative monetary policy [on top of strong fiscal expansion], cushioned the output losses while increasing inflation [Figure 7]. In 2021–22, both inflation and GDP as subsequently revised exceeded forecasts in the US and euro area. That combination is suggestive of unexpectedly strong demand, whereas an adverse supply surprise alone would raise inflation but lower output. [Figure 9].

Takeaways by Macro Roundup^® AI

Demand curves estimated from pre-pandemic US and euro-area data are relatively flat, reflecting central banks’ strong pre-pandemic responses to inflation, so adverse supply shifts produce large output losses but comparatively little inflation.
Explaining the 2022 combination of inflation and output requires an outward shift in demand, with strong demand — including unusually accommodative monetary policy atop fiscal expansion — cushioning output losses while raising inflation.
In 2021–22, both inflation and GDP as subsequently revised exceeded forecasts in the US and euro area, a combination suggestive of unexpectedly strong demand, since an adverse supply surprise alone would raise inflation but lower output.

Is The World Really Drowning In Debt?

Martin Wolf Financial Times

Date Posted:: September 30, 2026
Is Database:: Database

Wolf notes that the global debt-to-GDP ratio rose by less than 10pp btw 2018 and June 2026: after peaking at 337% in early 2021, it fell by 27pp by the end of 2023, as inflation boosted nominal GDP and eroded the value of existing debt.

The IIF shows that between 2018 and June 2026, the rise in the ratio of global debt to output was less than 10 percentage points. The story is striking: the ratio reached a post-Covid peak of 337% in early 2021, before falling by 27 percentage points by the end of 2023. What was this magical “debt-buster”? Good old-fashioned (and supposedly “unexpected”) inflation. This is — to put it mildly — not the first time inflation has wiped out debt. It was, to take one of countless examples, an important part of the UK’s elimination of its post-second-world-war debt. For countries able to print the money in which their debt is denominated, that is often what happens.

Takeaways by Macro Roundup^® AI

IIF data show the global debt-to-output ratio reached a post-Covid peak of 337% in early 2021 before falling by 27 percentage points by the end of 2023, with inflation identified as the force that eroded it.
Between 2018 and June 2026, the IIF shows the ratio of global debt to output rose by less than 10 percentage points.
Inflation has wiped out debt before, forming an important part of the UK’s elimination of its post-second-world-war debt, and often does so for countries able to print the currency in which their debt is denominated.

Choking Iran's Economy Is the Least Bad Way to End the War

Javier Blas Bloomberg

Date Posted:: August 20, 2026
Is Database:: Database

Inflation in Iran is running at at least ~69%, its highest annual rate in 70 years. The black market exchange value of a rial hit a record low of ~1.85mm rials to the dollar, relative to 50,000 per dollar five years ago.

[Iran's] economy is on track to suffer the biggest annual contraction since the nadir of the Iran-Iraq War in the mid-1980s. Inflation is running well above 50%, the highest annual rate since records start nearly 70 years ago. Worse, the cost of food and other necessities has already doubled from a year ago. Its currency, the rial, is worthless. In the black market, the exchange rate has collapsed to a record low of about 1.85 million rials to the dollar; five years ago, roughly 50,000 rials were enough to buy a greenback.

Takeaways by Macro Roundup^® AI

Iran's economy is on track for its biggest annual contraction since the nadir of the Iran-Iraq War in the mid-1980s.
Iranian inflation is running well above 50%, the highest annual rate since records began nearly 70 years ago, with the cost of food and other necessities already double year-ago levels.
The rial has fallen to a record low of about 1.85 million to the dollar on the black market, compared with roughly 50,000 rials per dollar five years ago.

A Return To Monetarism?

Peter Ireland, Stephen Miran and Nouriel Roubini Hudson Bay Capital

Date Posted:: July 16, 2026
Is Database:: Database
Is Important:: Important

Ireland, Miran, and Roubini compare the actual price level to the predictions of an equilibrium model relating prices to money supply. Predicted inflation hit a 60-year high in 2020–21, months before inflation surged and then crashed once the Fed hiked.

The graphs in Figure 3 show quite clearly how the surge in money growth starting in 2020 and continuing in 2021 put enormous upward pressure on inflation, to a degree unprecedented in the post-1967 sample period. And while the large and negative price gaps that followed in 2022 and 2023 are likewise indicative of strong disinflationary pressures applied through subsequent monetary tightening, one can’t see these graphs without asking: Had Federal Open Market Committee members been monitoring measures of money growth with the help of the P-star [price target based on monetary aggregates] model, might they have ended QE and raised interest rates sooner and more quickly, thereby avoiding at least some of the post-2020 inflation? Of course, massive fiscal expansion was another driver of the post-2020 surge in inflation, as suggested by fiscal theories of the price level. The model simply observes that regardless of its originating source, excessive money growth signals that inappropriate macroeconomic policies are fueling higher inflation. Fiscal expansions that expand money supply will be reflected in a P-star model.

Takeaways by Macro Roundup^® AI

The money growth surge beginning in 2020 and continuing into 2021 put upward pressure on inflation to a degree unprecedented in the post-1967 sample period, according to the graphs in Figure 3.
The large negative price gaps of 2022 and 2023 indicate strong disinflationary pressures from subsequent monetary tightening, raising the question of whether FOMC members using the P-star model would have ended quantitative easing and raised interest rates sooner and more quickly.
Massive fiscal expansion was another driver of the post-2020 inflation surge, as suggested by fiscal theories of the price level, and fiscal expansions that expand the money supply are reflected in a P-star model.

Home Alone: Inflation And The New Fed Chair

Michael Cembalest J.P. Morgan

Date Posted:: May 27, 2026
Is Database:: Database

Cembalest notes labor market tightness, price pressures in the manufacturing sector and the implied output gap are “much closer to conditions that have historically prompted the Fed to raise policy rates rather than to lower them.”

Inflation indicators the Fed watches include labor market tightness, price pressures in the manufacturing sector, supply chain tightness and the “output gap” which measures how far actual growth is above/below potential growth. [The two] charts plot these four variables at the time of prior Fed decisions to increase or cut policy rates; green dots indicate when the Fed cut, red dots indicate when the Fed tightened and yellow circles show today’s values. In other words: current values are much closer to conditions that have historically prompted the Fed to raise policy rates rather than to lower them. That may be why the futures curve is now pricing in Fed hikes instead of the cuts that were priced in at the start of the year. Superwonky: averaging several different monetary rules of thumb (Taylor rules, inertial, alternative r*, forward-looking) yields a Fed Funds range of 4.00% - 4.85% compared to the current range of 3.50% - 3.75%.

Takeaways by Macro Roundup^® AI

Averaging several monetary policy rules — Taylor rules, inertial, alternative r*, and forward-looking — yields a Fed Funds range of 4.00%–4.85%, above the current 3.50%–3.75% range.
Labor market tightness, manufacturing price pressures, supply chain tightness, and the output gap sit much closer to conditions that historically prompted the Fed to raise policy rates than to cut them.
The futures curve is pricing in Fed hikes rather than the cuts priced in at the start of the year.

US Consumer Sentiment Slides to Record Low on Price Concerns

María Paula Mijares Torres Bloomberg

Date Posted:: May 26, 2026
Is Database:: Database

The Michigan Consumer Sentiment Index hit a record low in May, falling ~10% month over month. Consumers foresee prices advancing 4.8% over the next year. Inflation and high gas prices have long been major causes of sentiment drops.

The University of Michigan’s final May sentiment index decreased 5 points to 44.8 from April. The gauge was weaker than all projections in a Bloomberg survey of economists as well as the preliminary reading of 48.2. Consumers expect prices to rise an annualized 3.9% over the next five to 10 years, up from 3.5% in April and the highest in seven months. They also saw costs advancing 4.8% over the next year.

Takeaways by Macro Roundup^® AI

The University of Michigan's final May consumer sentiment index fell 5 points from April to 44.8, a record low and weaker than every forecast in a Bloomberg survey of economists as well as the preliminary reading of 48.2.
Consumers expect prices to rise an annualized 3.9% over the next five to 10 years, up from 3.5% in April and the highest in seven months.
Consumers expect costs to advance 4.8% over the next year, according to the University of Michigan's final May survey.

.@johnHCochrane argues that inflation potentially peaking with the Federal Funds rate < CPI is evidence that the fiscal theory of the price level is the right way to understand inflation

Can inflation fade on its own with interest rates below inflation?

Takeaways by Macro Roundup® AI

Giannone and Primiceri revisit the relative role of supply vs. demand shocks in generating the post-Covid inflation. Because aggregate demand curves estimated from pre-pandemic data are flat, supply shocks alone would not have generated large inflation in the absence of added demand stimulus.

Did outward demand shifts, not supply shocks alone, drive recent inflation?

Takeaways by Macro Roundup® AI

Related Articles:

Wolf notes that the global debt-to-GDP ratio rose by less than 10pp btw 2018 and June 2026: after peaking at 337% in early 2021, it fell by 27pp by the end of 2023, as inflation boosted nominal GDP and eroded the value of existing debt.

Does inflation reduce the global debt burden?

Takeaways by Macro Roundup® AI

Related Articles:

Inflation in Iran is running at at least ~69%, its highest annual rate in 70 years. The black market exchange value of a rial hit a record low of ~1.85mm rials to the dollar, relative to 50,000 per dollar five years ago.

Is Iran's economy contracting at its fastest rate in decades?

Takeaways by Macro Roundup® AI

Related Articles:

Ireland, Miran, and Roubini compare the actual price level to the predictions of an equilibrium model relating prices to money supply. Predicted inflation hit a 60-year high in 2020–21, months before inflation surged and then crashed once the Fed hiked.

Would tracking money growth have helped policymakers tighten sooner?

Takeaways by Macro Roundup® AI

Related Articles:

Cembalest notes labor market tightness, price pressures in the manufacturing sector and the implied output gap are “much closer to conditions that have historically prompted the Fed to raise policy rates rather than to lower them.”

Do current inflation indicators point toward rate hikes rather than cuts?

Takeaways by Macro Roundup® AI

Related Articles:

The Michigan Consumer Sentiment Index hit a record low in May, falling ~10% month over month. Consumers foresee prices advancing 4.8% over the next year. Inflation and high gas prices have long been major causes of sentiment drops.

Are price expectations pushing consumer sentiment to a record low?

Takeaways by Macro Roundup® AI

Related Articles:

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