When it gets to the point of inflation, I’m still in the provisional group

Inflation is a lousy this Christmas. The economists on Team Transitory, myself included, should admit that we never expected inflation to soar. What happened? Is high inflation still temporary?

First, the surprisingly high 6.8% inflation rate reported by the consumer price index over the past year exaggerates the problem. A better measure, the one the Federal Reserve focuses on, is called the core personal consumption expenditures deflation, or core PCE measure. This price index excludes food and energy, as they are highly volatile and beyond the control of the Fed. It has registered an inflation rate of 4.7% over the past year.

So yes, we have an inflation problem. But 4.7% inflation is a smaller problem than 6.8% inflation. The question remains: How did we get here?

The old adage that inflation is caused by “too much money chasing too few goods” is approximate, but “too much demand leads to too little supply” is true. Demand has increased as the economy emerges from the terrible pandemic, but supply has not been able to keep up due to various bottlenecks and shortages.

The U.S. government provided major relief to needy families in March 2020 and March 2021. Massive wire transfer payments helped families manage and maintain their spending. The Federal Reserve has partnered with super-expansion monetary policy, which revived the auto industry and contributed to a housing boom.

Those fiscal and monetary policies, though imperfect, are wise. Without them, our economy would slide into a deeper and longer recession – possibly even into deflation. But these measures are only temporary. There will be no major financial expansion in March 2022, no matter what happens with President Biden’s Build Back Better plan. And the Fed is now moving away from the currency accelerator.

Moving to supply, Covid is concerned about shifting consumer spending away from services, many of which require close personal contact, to goods, which come to us safely in boxes. However, packages must be transported by truck and, if they are of foreign origin, transported by container ship and unloaded at the port. Strained container capacity, congested ports and truck shortages have resulted in undersupply.

In short, there’s an inflationary price to pay when you get out of the pandemic-induced recession quickly, and we’re paying that price right now. But to me, it’s still temporary — though that doesn’t mean it’ll end in a month or two. It won’t, which is probably why Federal Reserve Chairman Jerome Powell recently stopped using the word.

Several factors point to lower inflation rates ahead. First, the price of crude oil, which has more than doubled between November 2020 and October 2021, has begun to decline. Second, normal consumption patterns will re-emerge as pandemic fears subside. Consumers will start buying more restaurant meals, hotel rooms, and movie tickets — and fewer things in boxes. Omicrons may delay the return to normalcy, but it will happen. Third, capitalism is on our side. Shortage raises prices, but high prices create opportunities for profit, which attracts capitalists to alleviate the shortage. They don’t do this out of altruism, but out of self-interest.

However, this process takes time — time to increase semiconductor production capacity, time to get more trucks on the road, time to increase port capacity, etc. Inflation bottlenecks may go away in a few months, or it may take a year or longer. You might call another year of high inflation “temporary” or “terrible.” But it’s not likely to last forever, that’s why I’m still on Team Transitory.

What could cause Team Transitory to go wrong? High inflation is currently concentrated on things like used cars, airline tickets and gasoline. For example, the Dallas Fed’s version of PCE inflation, which strips out the fastest and slowest inflated components of the PCE deflationator, was just 2.8% over the past year. But inflation can be more widespread across a wide range of goods and services. High inflation can also eat into expectations and thus raise interest rates, but so far that hasn’t happened.

If the Fed starts to wage war on inflation now, the de-inflation impact will be negligible over the next year or two, and the anti-inflation medication could start to take effect as inflation begins to correct itself. Mr. Powell and his Fed colleagues seem too smart to go that route.

Mr. Blinder, professor of economics and public affairs at Princeton, served as vice chairman of the Federal Reserve, 1994-96.

Journalism Report Editor: It’s not a fad. For most Americans, that’s terrible. Image: Getty Images Synthesis: Mark Kelly

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https://www.wsj.com/articles/when-it-comes-to-inflation-im-still-on-team-transitory-price-index-pce-goods-supply-chain-logistics-federal-reserve-interest-rates-11640807029 When it gets to the point of inflation, I’m still in the provisional group

Ethan Gach

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