loading . . . Top economist issues warning: The economy is about to get 'really ugly' Following the Friday news that consumer sentiment has dropped to its all-time low amid an economy roiled by the consequences of President Donald Trump’s tariff program and war on Iran, Nobel Prize-winning economist Paul Krugman warns that things are about to get “really, really ugly.”
“The numbers are terrible, people,” he said. “We’re hitting a record low on consumer sentiment, which fits in with the general picture. We know that people are very upset about prices. They’re very upset about economic management. They just don’t feel that there’s anyone making any sense who’s in charge of things. Which is all true.”
And according to Krugman, while people are rightly worried about this news, “that is actually not the big issue. The really big issue is inflation expectations.”
As he explains, while short periods of elevated inflation are to be expected and tolerable, typically the numbers fall back to normal after some course correction. But if inflation persists long enough to be what experts call “entrenched,” it becomes a “really, really serious problem.”
“If you think about how wages and prices are set,” he elaborates, “think about the process of inflation. Not all prices are set at the same time. There’s a kind of a leapfrogging in which each individual company, each individual employer, is setting prices based both on inflation in the past and on inflation that they expect in the future. They’re looking over their shoulders at what they think competitors are going to be charging. They’re looking over their shoulders at what they think is going to happen to their costs.” And because it’s disruptive and costly to change some prices, they’re usually set well in advance, so they’re determined by what people “think” will be the state of pricing in the future.
This creates a harmful feedback loop.
“If you have a spike in inflation, if inflation comes and goes, but it doesn’t get built into expectations of higher inflation for a long time, then okay, you ride through it. Maybe people vote the bums out, but you ride through it,” says Krugman. “If it gets built into expectations, then it’s a much more difficult situation. Then you have to somehow wring those expectations of high inflation out of the economy because if you don’t, inflation will just feed on itself. Prices will rise because everybody expects prices to rise, and those expectations will be confirmed, and it just goes on.”
According to Krugman, historically speaking, one of the only ways to break out of such a cycle involves putting the “economy through a wringer.” He cites the 1970s and 1980s — another historically bad era for consumer sentiments — when persistently high inflation caused people to expect it to remain so, and it did. “Inflation was eventually brought under control, but that would happen through years of extremely high, punishing unemployment.”
Now, Krugman points out that the expected inflation numbers are the worst since the crisis of the 1980s.
“It is saying that the person on the street is starting to believe after the tariff shock and now the Iran shock that we’re in a higher inflation environment,” he explains. “And we have to suspect that people making decisions about prices are thinking the same way. They’re going to start building those expectations into pricing. So we’re starting to get the thing that everyone in the economics biz fears, which is entrenched inflation. If that’s happening, then the costs of the policy failures, the policy foolishness of the past year and a half are going to be a lot bigger than anyone is now reckoning.”
Krugman ends with a dire warning.
“This is going to be an extremely painful situation that we have,” he concludes. “It looks, at least according to these preliminary indications, as if Donald Trump has managed to create the kind of environment that we had at the end of the 1970s stagflation, which means that this is going to be really, really ugly and that we are going to be paying the price for these misadventures for years to come.” http://dlvr.it/TSgkrg
