We don’t need another ‘Great Inflation’ for surging prices to cause a worrisome level of inflation

By James Pethokoukis

From my email box: “Chief Economist: Inflation officially out of control.” Now the actual comments from the “Chief Economist” were not quite as dramatic as that spicy press release headline. But there’s little doubt that the worst inflation numbers since 1990 — the consumer price rose 6.2 per cent in October from a year ago — has some economists and market participants pretty worried. “I don’t see how the Fed can afford to wait,” Tom Graff, head of fixed income at Brown Advisory, told the Financial Times. “The pressure is getting awfully high for some sort of response.”

Gas prices grow along with inflation as this sign at a gas station shows in Solana Beach, California, U.S. November, 9, 2021. REUTERS/Mike Blake

Now we’re not necessarily on the verge of another 1970s (technically 1965-1982) “Great Inflation.” Not at all. But analysts who’ve been concerned this year about rising prices haven’t been making such a bold prediction. Here’s my AEI colleague Michael Strain back in May for Bloomberg:

Any period of sustained inflation is likely to begin with aberrant economic phenomena. The pattern takes months to emerge. In April, a fluke in the semiconductor supply chain sent the price of used cars soaring. Maybe this will return to normal in May, but then a transportation problem could suddenly push up the price of meats and eggs. Imagine that June brings them back to earth, only to see the cost of children’s clothes going through the roof. July and August each have rapid price growth, as well, for their own quirky reasons. Inflation skeptics seem to think that explaining the quirks dismisses the problem. It doesn’t. The relevant issue isn’t whether one-off factors explain any one month’s data. Instead, the question is whether the accumulated effect of several months of price spikes — each driven by unique factors — leads consumers, workers and businesses to change their expectations about the pace of future price increases.

And here we are. Inflation expectations are rising. A recent New York Fed survey finds households’ short-term inflation expectations reached a record high of 5.7 percent in October, up 0.4 percentage points since September. And according to Reuters/Ipsos poll, two-thirds of the country, including majorities of Democrats, Republicans, and independents, say “inflation is a very big concern for me.” 

Again, the big concern isn’t another Great Inflation, but rather, as Strain explained, “concern about persistent inflation will continue to grow, financial markets will become increasingly volatile and the Federal Reserve will find itself in a difficult situation.” (It’s also worth noting there is a long-term case for higher inflation not related to what’s happening currently as the pandemic-constrained global economies reopen.) We should all want this current economic rebound and expansion to last as long as possible and create as boomy a job market as possible. But when the Fed starts a tightening cycle, the risk increases of the central bank overdoing and pushing the economy into a contraction. And just imagine, as I point out in my new The Week column, “if progressive Democrats had been successful in further juicing consumer demand by getting jobless benefits expanded and extended on a permanent basis. Or if they had somehow pushed Congress to pass a $10 trillion infrastructure plan instead of one around $1 trillion.” Talk about a tsunami of demand totally swamping global supply chains and the US economy’s productive capacity. Yep, could have been worse, but the risks for what’s already happening are bad enough.

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Source: aei.org

We don’t need another ‘Great Inflation’ for surging prices to cause a worrisome level of inflation