- The Fed may have won its war against inflation without tanking the economy, Paul Krugman said.
- Krugman pointed to falling US unit labor costs and expectations of future inflation as evidence.
The Federal Reserve may have won its battle against inflation without tanking the economy, according leading academic Paul Krugman.
Krugman was referring to chatter about rapidly rising unit labor costs as a "reason for pessimism about inflation."
"But suddenly ULC is telling a much less dire story. In fact, it's suggesting major disinflation," the Nobel-Prize winning economist said in a Sunday tweet.
He also pointed to falling inflation expectations as a sign of "immaculate disinflation" in the US economy – when inflation cools without triggering a rise in unemployment.
"The Atlanta Fed also asks businesses how much their costs have risen over the past year. This number was much lower than pre-revision ULC; but now they're about the same," Krugman said.
"So we have a declining rate of cost increases and declining expectations of future inflation. An average would still show embedded inflation slightly above 3 percent - but it's clearly down over the past year. Score one for immaculate disinflation hopes," he added.
"And maybe the Fed's job is done?" Krugman concluded in his Twitter thread.
Inflation has declined significantly from its mid-2022 highs above 9% thanks to the Fed's aggressive policy-tightening campaign that's seen the central bank boost benchmark rates by 500 basis point since early 2022. April's report showed consumer price pressures rose by 4.9% annually.
Cooling inflation, alongside stress in the banking industry, has stoked hopes among traders that the central bank will pause its tightening campaign in July.
Unlike Krugman who suggests the Fed should stop hiking rates, former Treasury Secretary Larry Summers has advised the institution should continue with its war against inflation with more rate increases.