Commentary
U.S. inflation is coming down, but there are various reasons for this. Market analysts tend to follow the majority of views that the overall number is lowered by energy-related items. Official academics like those working for the Fed tend to find evidence for supply-side arguments. They employ the old structural equation models to decompose the shocks into demand versus supply and conclude. Yet this approach has been criticized since the 1970s (the previous inflationary episode) for missing an important element of monetary policy expectations.
Had the supply side been the main true reason, the Fed (and other central banks) would not have to hike rates in such an aggressive manner because the shortage of goods can only be solved by producing more instead of raising borrowing costs. They did so, implying they admitted the demand side argument wholeheartedly. It is the central bankers who invented the concept of a non-inflationary rate of unemployment (NAIRU), which implies the limit of monetary easing that is not leading to employment overheating. Now the limit is exceeded….