IGNORE THE INDICATORS; LOOK AT THE GLOBAL TRENDS:

As Goodhart explained, once upon time there were once two competing theories: the Friedmanite monetary theory that inflation was the result of too much money chasing too few goods and the Philips Curve theory that postulated a relationship between inflation and unemployment.

Both theories have broken down empirically over the past three decades. For myself, both are nice examples of the notion that it is better to think in terms of mechanisms (and ask if those mechanisms are still working) rather than models.

The replacement, in central bank land, has been what Goodhart dubbed a "a bootstrap theory of inflation": that as long as inflation expectations remain anchored, inflation itself will remain anchored. With a wonderful turn of phrase, Goodhart went on to call this "a very weak reed". As he demonstrated with his first slide, inflation expectations are reasonably backward looking and people tend to extrapolate their recent experience into the future.

Rudd's paper, which Goodhart went on to quote, picks up the story from this point.

It is easy to see why such an inflation model is appealing to central bankers. As he argues:

For a central bank with a price stability mandate, monitoring measures of inflation expectations can provide an important gauge of how well the monetary authority is meeting its goal, while attempts to shape the public's inflation expectations through central bank communications and policy actions will represent time well spent.

In such a world the job of central banking would be quite straightforward: as long as policymakers can credibility commit to take the necessary steps to keep inflation at a given rate - say, 2% - over the medium to longer term then firms and households would set prices and bargain for wages based on such an expectation. Shocks (like, for example, a pandemic) might temporarily cause inflation to rise or fall but it should return to its expected path. Expectations become almost a self-fulfilling prophecy.

Rudd though, it seems, is not one for telling reassuring stories. After demonstrating that the theoretical case for expectations determining actual inflation was always weak (surely for example firms and workers care more about short term inflation when setting prices and bargaining for wages and yet the theoretical case, in policy circles, has usually rested on long term expectations) he goes on to demonstrate that the empirical case has also always been weak. He does not pull his punches.

...it nevertheless remains the case that we have nothing better than circumstantial evidence for a relationship between long-run expected inflation and inflation's long run trend, and no evidence at all about what might be required to keep that trend fixed

Right now, the debate about how transitory or temporary the global spike in inflation will be is the hottest topic in macro. Between them, Goodhart and Rudd have done a good job of demonstrating that the best answer might be "we don't know". 

The Labor Department's official unemployment rate--the most well-known gauge of the labor market's health--counts as unemployed only those who aren't working but are actively seeking a job.

Yet there is very little that we can infer from the jobless rate about the health of the economy.  The unavoidable conclusion is that the only reason investors follow the calculation is because both Washington's politicians and the Federal Reserve are expected to react to it. [...]

Briefly, the unemployment rate is rather unrevealing if we do not know details about who is dropping out; if there were new programs introduced or eliminated, thus changing incentives - as has been the case with many Covid-provoked benefits, if changing tax rates and regulations induce people to cease looking for jobs and are living from a variety of black markets or falsely claimed government benefits, etc.  We also do not know if this society made investments abroad that are bringing in unexpected returns, positive or negative, implying that more than the domestic labor force is sustaining this society.  But the Statistics Bureaus, in the U.S. and elsewhere do not provide such information - often for the simple reason that even if they had information on demography (that sometimes can change rapidly - Do we know how many illegal immigrants are there?), they wouldn't know the certain meaning of the changes. 

Consider the present.  Though there was significant hiring with the easing of the Covid panic, as of October 10 weekly jobless claims totaled 326,000. These claims having been roughly stable since June.  Continuing claims for unemployment fell to 2.71 million, a decline of 97,000.  The total of those receiving benefits under all programs dropped to 4.17 million as some pandemic-related programs ran out (a year ago the number was a not-sustainable-for-long 25 million).  Meanwhile the Federal Reserve of Dallas estimates that 2.6 million people retired during the Covid episode which, if in the ballpark, would suggest that labor force participation would stay roughly where it is now - at almost 62%; some 2 percent less than pre-Covid. 

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