Inflation Is the Only Signal That the Post-Covid Boom Will Heed

Economics used to offer lots of metrics that claimed to show when growing economies were approaching some kind of speed limit. But increasingly, inflation is the only one that’s taken seriously.

A lasting surge in prices would likely convince policy makers that it’s time to tap the brakes on expansionary measures adopted in the pandemic, like high public spending or low borrowing costs. That’s why Tuesday’s consumer-price data in the U.S. will be so closely watched -- though it’ll take more than a single month’s numbers to change minds.

Meanwhile -- as part of a profound shift in economic thinking that’s gathered pace in the past year -- a whole range of other indicators once relied on to flag trouble ahead are falling out of favor.

Budget deficits and public debt were thought to flash a warning sign at certain levels -- until plenty of countries exceeded those limits, especially in the last year, without crashing. Estimates for full employment, or the most jobs an economy could create without overheating, turned out to be wrong.

Measures of the so-called “output gap” are supposed to capture how close an economy has gotten to its maximum capacity -- but many analysts have concluded that they rely too much on the recent past to be a useful guide.

Humility Pivot

Abandoning or downplaying all of these yardsticks means officials are less likely to take the kind of pre-emptive action that’s choked off expansions in the past.

The shift also amounts to a pivot toward humility, in a profession not famous for it. Economists used to be comfortable with offering their predictions as a basis for policy. They’re having to acknowledge that the future is full of things they simply do not know.