Whether the elevated inflation readings of the last few months will prove “transitory” has been the main subject of comment about them. It’s understandable that we want to know how long we will be going through the pain and disruption of this burst of inflation, and I’ve written about that question myself. But it’s worth keeping in mind that the extent to which this inflation is transitory is not directly relevant to the debate over macroeconomic policy. What matters for that debate is the related but distinct question of what’s causing this increase in inflation.
If the cause is mostly monetary factors — an increase in the money supply or a decrease in demand for money balances — that’s an indication that the Federal Reserve may need to tighten monetary policy. If, on the other hand, it’s mostly supply disruptions, then tightening would compound the problem of lost output from those disruptions. And tightening in response to negative supply shocks would be a mistake even if such shocks continued indefinitely.
My views on the “transitory” question remain what they were a few months ago: The inflation spike is probably mostly transitory. By mid fall, the comparison of prices to prices twelve months earlier won’t reflect the peculiar circumstances of the initial lockdown period, and supply-chain weaknesses at the start of the recovery should have been worked out (partly because high prices create an incentive to generate supply).
Afterward, I’d expect inflation to run a bit higher than it did on average during the 2009-2019 period, because a few years ago the Federal Reserve shifted to an “average inflation targeting” regime that seems less likely to yield results chronically below its 2 percent annual target. That’s why I think higher inflation is likely to be “mostly” rather than entirely transitory.
The Fed might well be justified in tightening modestly (e.g., by adjusting its forward guidance). It would be a mistake to tighten substantially. That’s not because today’s inflation is mostly transitory. It’s because it mostly doesn’t have monetary causes (which is also why it’s mostly transitory).