Our Inability to Predict Inflation Is an Embarrassment to Economics

We were surprised when inflation rose. We were surprised when inflation fell. And we were surprised again when inflation stopped falling. The message of all these surprises is that we — including professional economists — really don’t have a strong grasp on why prices go up and down.

The shakiness of our understanding is no small problem because inflation matters, a lot. A big reason President Biden is lagging in the polls is that voters, rightly or wrongly, blame his policies for the inflation surge of 2022, when the annual change in the Consumer Price Index briefly hit 9.1 percent. The Federal Reserve is so intent on getting inflation down to its 2 percent target that it’s risking a recession by keeping interest rates high.

Aside from those practical considerations: If we don’t understand inflation, then we also don’t truly understand anything else about the business cycle (if there even is one), because growth and inflation are intertwined.

I happen to think the stock and bond markets overreacted to the higher-than-expected increase last month in the C.P.I. that was reported this week, which to me looks more like a blip than a serious reversal. But I admit that I don’t know for sure. Nobody does.

When I wrote about our collective cluelessness in a blog post on Wednesday, the day the C.P.I. for March came out, I quoted Jerome Powell, the chair of the Federal Reserve, who likes to say that the Fed rate-setters are navigating by the stars under cloudy skies.

Since then I’ve started reading a new book by a Fed insider, Jeremy Rudd, that has made me think that things are worse than Powell’s nautical metaphor would indicate. Despite its bland title, “A Practical Guide to Macroeconomics,” Rudd’s book is a wide-ranging condemnation of academic macroeconomics for failing to generate advice and ideas that are useful to policymakers, such as Fed officials.