Is it possible to forecast a lost art? Pundits suggest that the models are broken and that it is a lost science. A general feeling among analytical elites is that our chaotic times have rendered future-gazing impossible.
The forecasting industry is still alive and well and will be for as long as can be predicted. What's the reason? We aren't disqualified from the task because of inaccuracy. The flow of business, the maintenance of a household and the management of government policy all depend on predictions.
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What do we think about the sudden start of inflation?
In February of 2021, the annual consumer price index inflation was just 1.2 per cent. Five months later, it had doubled to four percent. By the end of the year, it had risen to 8.1 percent, despite assurances that it was temporary. We were zapped back to the 70s after a long time of control.
In the United States, the consumer price index peaked at 9.1 percent in June. The European Union initially resisted monetary tightening and now faces an annual consumer price increase of 9.9%. The more volatile prices of food and energy made the increases more significant. Core prices are out of the comfort zone of central banks, and until recently were going the wrong way.
The world is shocked. Canada has enjoyed over 30 years of prices that haven't budged from the target point of 2%. How could so many be so gullible?
It's the first thing, hysteresis. What existed for so long is expected to always be, regardless of conditions. The second thing is messaging. Pundits were gloomy about recovery prospects and had an army of world leaders and policymakers convinced that soaring unemployment and sluggish demand would stanch price and wage inflation for years to come Something went wrong. Why was it taken so seriously? Recent history may be a third factor. The global economic crisis of 2008 is the only real downturn that many of today's decision-makers have experienced. Cut and paste the recovery. This is the second time it has happened.
Yogi is correct that it is difficult to make predictions about the future. He said that hindsight is not always right. It is easy to pounce on an obvious miss, and to most, it is useless. We can learn from the episode if that's the case. Is there anything to learn?
I would think so. Things can turn on a dime regardless of the length of a regime. It is not possible to take for granted anything. They can be dead wrong regardless of how good the spokesman is. Not a lot of pundits go down in flames over bad calls.
The third lesson is that economic downturns are not exactly the same. There was a mistake in equating the 2020 economic collapse with the previous one. It was not the same as the previous year. It was a policy decision that happened to us. This one did not precede a multi-year bubble of globalized irrational exuberance. It was not the case; a period of under- performance in the world's engine economies had quietly given rise to a groundswell of demand. There was a surge of mid-pandemic savings. One of the most dramatic, instant V-shaped recovery on record was created by the policy decision to restart the economy. Supply couldn't keep up with demand, there was nothing wrong with that.
Business strategy, policymaking, and even household planning could all be improved by this lesson. If the world is fundamentally strong, then rising interest rates are not bubble-bursters, they are accommodating sustainable growth, and the move toward more neutral rates is a sign of a return to normal. It's possible that slamming demand to restore overall balance isn't a good idea. Efforts might be better spent restoring supply chain logjams that are truly temporary and ferreting out the fleeting opportunism that accompanies a sudden rise in prices. It suggests that fiscalStimulus may not be as bad as people think.
Ultra-low rates will not be easy to get rid of. If it occurs in conjunction with other possible private and public actions, it might just achieve its stated aims and be less painful than people think.
Peter Hall is the CEO and chief economist of Econosphere Inc.
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