Nobel laureate Paul Krugman says he's confused by the current US economy - and predicts the Fed will keep fighting inflation until it's clearly won

• Paul Krugman can't get a good read on inflation, unemployment, and the health of the US economy.
• The Nobel Prize-winning economist blamed rolling price shocks and faulty, lagged data.

Paul Krugman, a Nobel Prize-winning economist, doesn't know what to make of the current US economy.

"We don't have a very clear picture of what's happening to inflation right now," he said in a recent New York Times column, describing the situation as "murky" and "genuinely confusing."

The pace of price growth surged as high as 9.1% last summer, spurring the Federal Reserve to hike interest rates from nearly zero to upwards of 4.5% in a bid to cool inflation.

Higher rates make borrowing more costly and encourage saving over spending, investing, and hiring, which typically cools the economy and can even cause a recession. However, recent data suggest inflation remains elevated, the labor market is still in rude health, and growth is yet to stall.

Krugman, in his column, detailed several reasons why it's tricky to gauge current inflation. He pointed to ongoing shocks to the economy, which cause violent fluctuations in the prices of used cars and other goods and services.

He noted that official rent measures lag market rates by a year or more, and underlying inflation measures can be biased or exclude too many items to be useful.

More and more businesses are declining to take part in government surveys as well, and government agencies' large adjustments to past data such as consumer price inflation and worker pay have muddied the overall picture, he added.

"Right now, official measures of job openings show an extremely hot labor market, but private-sector measures show significant cooling," he said, giving an example of why it's hard to get a read on the economy's health right now.

Even so, it's safe to say that price growth has cooled since early last year while remaining above the Fed's 2% target, Krugman said. He added that the US economy remains buoyant despite the US central bank's rate hikes, and he sees no sign of inflation becoming entrenched and requiring a big spike in unemployment to conquer.

"Given this picture, I don't see how the Fed can avoid continuing to raise interest rates until it's more or less unmistakable that inflation is coming under control," he said.

Krugman added that he sees no reasons to get stressed yet. "The Fed is creeping its way forward through a dense data fog, and this suggests to me that it should avoid drastic moves in either direction," he said.

The Nobel laureate underlined his deep uncertainty about the state of the US economy in a Sunday tweet. He shared a chart showing residential building construction has climbed steadily since early 2021, whereas private-sector housing starts have plunged over the past year.

"The most puzzling chart in economics right now," he tweeted.

"If you were looking at housing starts you'd think there was a significant slowdown in process," he continued. "But employment hasn't declined at all."

Krugman was emphasizing that a sharp decline in the number of new houses being built would normally suggest the economy is slowing down or shrinking — but a red-hot job market indicates growth isn't suffering yet.

"I honestly don't know quite what's happening, but surely this is a large part of the mystery," he added.