This relative inflation in the prices of goods as compared with services was unavoidable if we didn’t want to experience crippling shortages - which we did, in fact, avoid: some consumer items have been hard to get, but predictions of a holiday-season “shipageddon” didn’t come true.īut we could have had lower overall inflation if we had squeezed service prices - say, by slashing aid to families or raising interest rates, and thereby restraining private spending - instead of doing what we did, which was to make the whole adjustment via higher goods prices. Sure enough, the ratio of the price index for durable goods to that for services has risen substantially, reversing its normal technology-driven downward trend. Real purchases of consumer durables are still running more than 20 percent above the prepandemic level, while purchases of services have only recently returned to their level of two years ago.Īnd supply chains have had a hard time keeping up with surging goods purchases.Įcon 101 tells us what should happen in the face of skewed demand and constrained supply: The prices of the things people are scrambling to buy should rise relative to the prices of things people are still shunning. Fear of infection has limited demand for in-person services like restaurant meals, and people have compensated by buying physical goods like cars and household appliances. Let’s start with what should be an unobjectionable point: The Covid-era recovery has been very unbalanced. I can already hear the screaming, but bear with me for a bit. ![]() ![]() In fact, given the dislocations associated with a continuing pandemic, we ran what was in effect a Goldilocks economy, one that was neither too cold nor too hot. If I’m right on both counts, however, a surprising conclusion follows: Economic policy in 2021 was actually pretty good.
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