Nobel Prize-winning economist Paul Krugman says fears of runaway inflation are hugely overblown - and dismisses the risk of stagflation
- Paul Krugman dismissed the idea that inflation expectations are out of control.
- The economist highlighted Treasury-bond data showing markets are expecting moderate inflation.
Paul Krugman rejected the idea that inflation expectations are getting out of hand, and downplayed the risk of stagflation, in a slew of tweets on Wednesday.
"5 year breakeven at 2.48. Out of control inflation expectations my ... asset," he tweeted, referring to the current level of the St. Louis Fed's 5-year breakeven inflation rate, which measures expected inflation based on Treasury note data.
The inflation indicator dropped from 3.34% in March to 2.48% on July 6, marking its lowest reading since August last year.
The Consumer Price Index (CPI) hit a 40-year high of 8.6% in May, fanning fears that employees would start demanding wage increases, and businesses would begin hiking prices in anticipation of their costs rising and competitors raising prices. Those trends could spark a dangerous combination of rapidly rising prices and slowing economic growth known as stagflation.
Krugman, who won the Nobel Prize for economics in 2008, dismissed Bill Ackman's warning in late May that inflation was out of control, and inflation expectations were getting out of control.
"Not sure people realize how dramatically the runaway inflation narrative has now collapsed," he tweeted on Wednesday. "Market expectations are way down."
The economics professor and columnist noted that markets aren't necessarily correct about the rate of future price increases, but they show "no sign of expectations of inflation getting entrenched, which is what you need for stagflation."
Krugman added that the "stagflation narrative is really collapsing," but argued it was being propped up by commentators who have been "waiting years for the chance to posture sternly against runaway inflation, and really, really won't want to back down."
The Nobel laureate emphasized that inflation data for June, expected next week, might not reflect declining expectations of inflation. He pointed out that retail gas prices didn't peak until mid-June, and remain a long way from reflecting the recent crash in wholesale prices.