By Anne Lipsett
As we wade through the receding flood waters of COVID-19, we are left dealing with the economic fallout. In the United States, no sector has been able to avoid rising prices, as inflation has touched everything from food to fuel. Inflation is defined as the ‘decline of purchasing power of a given currency over time,’ and in the US, it has hit a 30-year high. Essentially, prices are rising because the currency—in this case the US dollar—is losing its value. Inflation is a natural phenomena within the economic life-cycle, as the value of currency is not stagnant. However, these past few months have seen massive price hikes across the board. The Federal Reserve (Fed) has been reassuring Americans that this is transitory inflation. Transitory means it is not permanent and prices will deflate in time. However, many economists and large institutions are starting to voice their doubts about just how temporary it is. This article will explore the debate, looking at timelines and analysis of economists who are team transitory inflation and team persistent inflation as well as include a critical reflection of the state of American inflation.
Inflation is a hot button issue because once it meets a certain benchmark, the Fed should increase interest rates to match the heightened cost of living. The Federal Reserve has a 2% target inflation. Right now, inflation is running at 6.2% as of October 2021.
Those who are on ‘Team Transitory’ are hopeful that it will start going back to normal once the pandemic winds down further, and they have set that as their timeline. Fed Chair Jerome Powell is adamant that once supply bottlenecks have eased, there will be a deflation in prices. He and the Biden administration have been placing the entirety of the blame on global supply chain issues and do not foresee any problems once they have opened up again. While no clear timeline exists, Powell continues to say that it will be better once the pandemic side effects ease.
Powell is waiting to pull the trigger on raising interest rates until the labor market recovers more, but economists are skeptical of this approach, especially because labor shortages are at an all-time high as people continue to quit their jobs. In a situation such as this, economists are questioning how the central bank defines transitory. Kathy Bostjancic, chief US financial economist at Oxford Economics pointed out that transitory, in its simplest form, means that it will not last in perpetuity. So, in theory, it is transitory, but after over six months of rising prices and with no light at the end of the tunnel just yet, economists are jumping ship to join ‘Team Persistent’.
On the other side, there are the economists who feel that inflation will be persistent, or, at the very least, last longer than those who believe it to be transitory. Pent up consumer demand, rising wages, and supply bottlenecks have created a perfect storm for inflation to continue to spiral. Bostjancic has indicated that she believes it will get worse before it gets better, but should start to ease by the second quarter of 2022. Goldman Sachs analysts have predicted an easing of inflation by the end of 2022. Raising interest rates is a move that would help to tame inflation, but the Fed’s reluctance to do so could spell trouble for this being considered transitory. Capital Economics released a statement to investors that inflationary measures are broadening out, which indicates that inflation will linger for longer than anticipated by the Fed. The president of the Atlanta Federal Reserve, Raphael Bostic, has broken away from Fed leadership and has stated that he no longer considers it to be transitory and inflation is here to stay for the time being.
Those on ‘Team Persistent’ do not consider this to be as bad as it was in the 1970s, nor do they think this will be a years-long battle. However, they no longer consider this to be a temporary problem that is a side effect of the pandemic. They cite the uncertainty on when this will ease as a reason one cannot consider it to be transitory; it is hard to label something as temporary when one cannot tell when it will end. Both sides of the debate raise fair points. While the pandemic has certainly been a driving force behind the price hike, inflation has taken on a life of its own and broadened beyond what was seen earlier in 2020 with rising home and vehicle prices. No consumer product has been left untouched from inflation, and with rising wages, near-zero interest rates, and continuing supply chain problems, organizations will have to continue to raise prices to make ends meet. The Fed needs to announce a plan to tame inflation, as consistently towing the party line of ‘Team Transitory’ has done nothing to assuage the fears of US consumers. Consumer sentiment in the US is at a ten-year low due to fears about inflation and anger at the Biden Administration for failing to put any policy in place to ease the burden. Inflation affects everyone, with low income earners being affected the most. If this trend of inaction continues, consumer sentiment will fail to bounce back and inflation will run unchecked. Transitory inflation would imply that people could grit their teeth and bear it as they wait for a self-correction, but this is no longer the case, and the Fed needs to put a plan in place to tame what has gotten out of control.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.