Economics: A very nice piece by the sharp Arpit Gupta. I believe he is 100% right on sectoral rotation. I would, again, plead for people to pay much more attention to thinking about the natural rate of inflation—what rate of inflation is needed to get real micro prices across sectors into what a flexprice market economy wants them to be?

In addition, he is right that this is not an inflation-expectations story because (with the exception of the April 2023 10-Year TIPS inflation anchor-dragging crash and the August-October 2023 10-Year Nominal Treasury r*-is-way-up episodes) expectations of the long run did not move. And the points about labor flexibility and productivity are well-made, and important.

I did have one major wince, however. Gupta claims we have just seen “fairly historically unique set of circumstances resulting in a sectoral reallocation”. But we saw this in the late 1940s and early 1950s.

A knowledge of economic history is a true secret weapon in considering possibilities, not being completely blindsided, and not being stupid:

Arpit Gupta: The Goods-Services Rotation Theory of Inflation <arpitrage.substack.com/p/the-goods-serv…>: ‘Under… flexible prices… sectoral reallocation would work out just fine… Because of this interaction of price rigidity and sectoral impacts, you can get aggregate inflation even if total spending doesn’t change at all: the first rotation to goods increases the overall price level, and the second rotation back to services does as well….

Inflation seems more a product of conditions on the ground at the moment, rather than the more complicated forward-looking story…. Inflation… [making] people… pessimistic… lower their spending today… some stabilizing dynamics with respect to inflation….

Another miss here is thinking about the labor market: Larry Summers and others… pessimistic <nber.org/papers/w29739 about the labor supply side… follow[ing] a lot of pessimism, in the 2010s, about the marginal productivity of laid off workers. Instead, it turns out the labor market was able absorb many…. The pandemic period of inflation deserves to be considered in its own right; not as a simple restatement of previous trends. With the benefit of hindsight; it seems like the economy wasn’t in as much risk of remaining either stagnation in demand (as it was in the 2010s) or in persistent inflation (as in the 1970s).

We experienced a fairly historically unique set of circumstances resulting in a sectoral reallocation of spending towards goods and then back to services, and this pattern can explain a lot...