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(Note: This article originally appeared online through the American Institute for Economic Research)Many influential figures claim that supply-side improvements explain easing price pressures. This view is especially common among those affiliated with the Biden administration. A few weeks ago, Treasury Secretary Janet Yellen said in an interview that “supply-chain issues that resulted from the pandemic…seem to be healing, and as that happened, inflation has moved down.” She echoed this claim in a widely read opinion piece, arguing that Bidenomics “helped ease supply-chain bottlenecks that had contributed to a surge in goods inflation.” This is quickly becoming the accepted explanation for ongoing disinflation.But there’s a gaping hole in this story: The economic theory that underlies it makes predictions that are clearly inconsistent with the data. While improved productive conditions can sometimes cause prices to grow more slowly, or even fall, they aren’t the main reason inflation is slowing now.To begin, notice that the supply-side disinflation story is symmetric: If production problems caused prices to rise, then fixing those problems should cause prices to fall. Certainly there were production bottlenecks and other supply difficulties from the COVID-19 pandemic that lasted a while. The producer …
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