As US inflation gradually eases, the claim that today’s inflationary pressures are the result of a temporary supply shock has re-emerged. While this thesis may be comforting, it could also encourage dangerous complacency, making an already serious problem much harder to solve.
CAMBRIDGE – Nearly two years into the current bout of inflation, the concept of “transitory inflation” is making a comeback as the COVID-related supply shocks dissipate. This comes at a time when it is critically important to keep an open mind about the trajectory of inflation, including by avoiding an over-simplified transitory narrative that risks obfuscating the real issues facing the US economy. “Transitory” is a comforting notion suggesting a short-lived, reversible phenomenon. Critically, the concept assumes away the need to adjust behaviors. After all, if an inflation scare is only temporary, the best way to deal with it is simply to wait it out (or, to use a policy and market term, “look through it”). That is why this narrative is particularly dangerous. By encouraging complacency and inertia, it could exacerbate an already serious problem and make it harder to solve. The US Federal Reserve’s initial response to rising inflation is a case in point. In 2021, the world’s most powerful and influential central bank rushed to characterize higher inflation as transitory. It doubled down on this approach even after the data went against it, refusing to pivot for too long.
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