Transitory Inflation? Move Along. Nothing to See Here.

Many Beacon readers will be aware that the current rate of inflation, measured by the government’s Consumer Price Index, is 6.2%, measured from October 2020 to October 2021. Jerome Powell, Chair of the Federal Reserve Bank’s Board of Governors, says this inflation is transitory. Yet he also says we could be seeing high inflation rates into next summer.

Federal Reserve officials either are deliberately downplaying the current inflationary environment, or have a poor understanding of the forces behind it. In an earlier Beacon post, I linked to this article in which John Williams, President of the Federal Reserve Bank of New York, forecast that he expected inflation to be 3% in 2021, falling to 2% in 2022. How can the experts who engineer our monetary policy be so wrong?

If there is anything transitory about our current inflation, it is that 2020 was the anomalous year, in which inflation was artificially lower because of the reduced demand due to the COVID pandemic and policies. When businesses are shut down and people are put out of work, they become more cautious in their spending. That postponed the effects of the Federal Reserve’s inflationary policies, which are now coming back.

The inflationary experience of the 1970s shows that once inflation appears, it is both difficult and painful to stop. Our policy makers have already let inflation get out of hand. While Federal Reserve officials seem to be downplaying inflation, President Biden has noticed and says that reducing inflation is a top priority. He hasn’t said what he will do to reverse the current inflationary trend, and once the wheels of inflation are put into motion, there is little he actually can do.

The appearance of inflation lags the forces that cause it. That means that it takes some time for inflation to show up, but it also means that once measures are taken to slow it, it also takes some time for inflation to recede. The president may have made a tactical political error by saying that reducing inflation is a top priority, because when inflation persists, that will look like a policy failure on President Biden’s part.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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