After all, the political crises and wars in the early to mid-20th century were all preceded by intense periods of price instability, with inflation in Weimar Germany seen as prime cause of the rise of Nazism. The DNA of every central bank is to fight inflation. Inflation is an economic statistic, but it is also an intensely charged word and experience. That means that headline inflation (which measures year-over-year) will almost certainly moderate, even in the absence of whatever the Fed does to increase rates. In addition, in the months ahead, the headline inflation numbers will start to reflect comparisons from mid-to-late 2021, when prices had begun to rise from their pandemic lull. In short, the monthly pace of inflation is now much slower than the year-over-year rate and has shown signs of stabilizing. In the most recent report, the 8.3% number got the most attention, because that confirmed the current narrative of “inflation is out of control and the Fed is behind and the government has overspent.” But the month-over-month increases have been plateauing in recent months, except for energy costs which the Fed can’t do much about and has more to do with the disruptions stemming from the embargoes against Russia. That is not the same thing as describing the year (or years ahead). The Fed has kept rates low, and now we are in an inflation spiral. Hence the shortage of semiconductors chips for automobiles, for instance, or the lack of enough glass bottles for all the booze people were buying, And then came the Russian invasion of Ukraine, which sent commodity and agricultural prices soaring. and around the world led to an explosion of pent-up consumer demand, which completely deluged global supply chains that weren’t staffed or prepared. That inevitable arrived in 2021 when the combined effects of a waning pandemic and trillions of dollars in government stimulus in the U.S. What’s more, the efforts of central banks to keep markets liquid was simply delaying the inevitable. The thesis went like this: for decades, but especially since the financial crisis of 2008-2009, the price of money had been artificially kept low by global central banks with the result that while there was little measurable inflation of the goods people use (gas, food, furniture), there was lots of covert inflation in the prices of homes and stocks. Until 2021, inflation had been the proverbial dog that didn’t bark, but that only solidified a view especially prevalent in the financial community that when inflation eventually did rear once again, it would do so with a vengeance. Now that inflation has been elevated for months, he has been doing the rhetorical version of victory laps and many have cited him as part of an overall argument that for the first time since the late 1970s, the inflation genie has been let out, with unpredictable and likely destructive consequences.
He warned the size of the federal COVID-19 aid bill in early 2021 combined with very low interest rates would trigger inflation, and he has been loudly critiquing the Fed for being “behind the curve” in its delayed willingness both to raise interest rates and to curtail its policy of buying bonds to bolster the markets. The most vocal inflation hawk over the past year is former Treasury Secretary and former Obama economic czar Larry Summers. But what if the consensus is, as is so often the case, wrong? What if those who last year said that inflation was, the words of the chair of the Fed Jerome Powell, “transitory,” were more right than wrong even though they underestimated how long transitory would last? What if the predisposition of so many for so many years to be on guard against inflation has also made them inflation paranoid? It may be that elevated inflation is now a thing. But a consensus about future outcomes doesn’t mean certainty about future outcomes. And hence the panic in the Democratic Party (and glee in the Republican) that voters will hold Democrats accountable for rising prices in the fall midterms. Hence the aggressive rhetoric coming from the Federal Reserve about raising the target for short-term interests more quickly and sharply, which led the bank to a 50bps rate increase in early May. There is now a broad consensus that inflation is not only too high but that there’s no immediate end in sight.
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