Unfortunately I believe that the topic of inflation has become politicized. It's abundantly clear that inflation is high and broad-based. But for the economists on "Team Blue" they know this means less freedom to spend on preferred causes (since neither team wants to fund their pet projects with tax increases). If Team Red were in power we'd be hearing about the risk of inflation non-stop.
This is short-sighted of course, as I believe inflation will be a dominant theme of the midterm elections. If Team Blue isn't seen as taking it very very seriously they will lose badly. Inflation hurts the weakest among us and helps existing asset owners - the electorate knows this.
The FRB knows what to do IF a normalization of COVID-related supply and demand issues doesn't unwind inflation. Wait a year, the downside is minor – if you're correct and inflation expectations are higher, we'll know whether they are flexible downward as readily as (per your argument) they have been flexible upward. IMHO the cost of waiting is low, relative to the cost of slowing the economy.
Of course in practice the FRB operates in small increments, even if Powell does not demand a consensus before acting (the various Chairs have varied in how strongly they want to get agreement from most of those present). So even if the FRB does begin responding as you argue necessary, by next year they won't likely have raised rates enough to really bite / start slowing the economy and throwing people out of work.
You can then link back the idea of inflation being broad based to the policy question of price controls. Price controls loose their efficacy when the increase is very broad based. A more useful line of enquiry may be to trace the shocks to domestic vs. foreign sources of price increases and then explore the resulting policy implications.
Unfortunately I believe that the topic of inflation has become politicized. It's abundantly clear that inflation is high and broad-based. But for the economists on "Team Blue" they know this means less freedom to spend on preferred causes (since neither team wants to fund their pet projects with tax increases). If Team Red were in power we'd be hearing about the risk of inflation non-stop.
This is short-sighted of course, as I believe inflation will be a dominant theme of the midterm elections. If Team Blue isn't seen as taking it very very seriously they will lose badly. Inflation hurts the weakest among us and helps existing asset owners - the electorate knows this.
The FRB knows what to do IF a normalization of COVID-related supply and demand issues doesn't unwind inflation. Wait a year, the downside is minor – if you're correct and inflation expectations are higher, we'll know whether they are flexible downward as readily as (per your argument) they have been flexible upward. IMHO the cost of waiting is low, relative to the cost of slowing the economy.
Of course in practice the FRB operates in small increments, even if Powell does not demand a consensus before acting (the various Chairs have varied in how strongly they want to get agreement from most of those present). So even if the FRB does begin responding as you argue necessary, by next year they won't likely have raised rates enough to really bite / start slowing the economy and throwing people out of work.
We can both be correct...
Start by asking which definition of inflation is being used.
Good piece - thank you.
You can then link back the idea of inflation being broad based to the policy question of price controls. Price controls loose their efficacy when the increase is very broad based. A more useful line of enquiry may be to trace the shocks to domestic vs. foreign sources of price increases and then explore the resulting policy implications.