Nobel Prize-winning economist Paul Krugman is worried that investors are getting too relaxed about inflation and that as financial conditions loosen, inflation will rise again. “The markets are pricing in that inflation is over. That could be a self-denying prophecy,” Krugman said in an interview with Bloomberg Television. While it does appear that the Fed is accomplishing its goal of tamping down inflation—both the consumer price index and core personal consumption expenditures rose at their slowest rate in more than a year—Krugman expressed concerns that “the markets may be getting ahead of themselves.”
Even as inflation cools, there may be too much certainty that the inflation threat has passed, and that could spark prices to jump up again. Indeed, though energy costs have dropped, food prices have stayed persistently high. And the job market is still strong, fueled by rising wages and increased demand for labor. Meanwhile, the Fed is widely expected to raise rates by 25 basis points again this week. Though that’s less of an increase than the rate hikes last year, interest rates will likely remain high for the rest of the year and most analysts predict at least a short recession before the Fed begins to slash rates. There are many crosscurrents blowing through the U.S. economy, and there’s likely to be a good deal of lag, meaning markets might not be realistically priced. “We’re in this very disordered time,” Krugman told Bloomberg. “There’s a lot of unknowns.”
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