Perhaps we shouldn’t be too hard on President Biden and Federal Reserve Chairman
for insisting for months that inflation would be “transitory.”
While the word has come to be understood as denoting something short-lived, its literal meaning conveys more latitude: an event or condition that is temporary; something that eventually passes.
On this reading, the current inflation could be transitory even if it lasts another decade. The Great Depression was transitory. Life itself, as poets and priests remind us, is transitory. Sic transit gloria mundi, they chant when a new pope is installed.
So it’s welcome that Mr. Powell at least has decided to retire the term, not primarily because it was misleading, but because it was meaningless.
The meaningful question for this, as for all events in human history, is: How long will transitory be?
The Great Inflation, which lasted almost two decades from the mid-1960s to the early 1980s, eventually proved transitory, but in its time it eviscerated the value of savings and investments, contributed to the failure of at least three presidencies, produced unprecedented economic misery and stagnant growth, and fed a widespread belief in the imminent failure of American capitalism.
It proved transitory only after
at the Fed throttled it with a vicious monetary contraction and President Reagan simultaneously reinvigorated the productive capacity of the U.S. economy.
Despite the best efforts of the current incumbents at the Fed and the White House to emulate the staggering combination of policy errors that contributed to the Great Inflation, no one serious at the moment thinks we are in for a full-on repeat. Fiscal incontinence and monetary abandon of a sort that would have been familiar then in the ’60s have seen the federal debt balloon this year to nearly 123% of gross domestic product and the central bank’s balance sheet explode to nearly $9 trillion. We haven’t yet started a war in Southeast Asia or seen the quadrupling in oil prices that catapulted general prices into the stratosphere last time. But Messrs. Biden and Powell are giving it the old college try.
It’s welcome news that Mr. Powell and his Fed colleagues are likely to accelerate the tapering of their bond-buying program this week. But historians surely will regard it as inexplicable that even on a faster timetable, the central bank will continue to purchase hundreds of billions of dollars in Treasurys and mortgages over the next few months at a time when core inflation is running at around 5%, unemployment is 4.2% and declining, and GDP growth, according to the Atlanta Fed’s latest estimate, is close to an annualized 9% in the current quarter.
Growth will slow next year, and perhaps inflation will too, but the mismatch between monetary policy and the condition of the economy is still virtually unprecedented.
The latest International Monetary Fund forecast, in October, projected growth next year of 5.2%. Even if inflation slows to half its current rate, and if the Fed does follow the end of its bond buying with a succession of rate increases, as the markets now expect, that would still leave us with nominal growth above 8% while official interest rates are at barely 1%. It’s hard to imagine how this is anti-inflationary.
The key to the path of inflation is, as ever, expectations. Here, the particular problem for Mr. Biden is the discordance between his insistent optimism about the economy and a realistic explanation of how inflation comes down.
Even if the supply-chain issues that have contributed to inflation ease next year, the high risk is now that employees—who have seen their real wages decline in the past year as consumer prices have surged, will want to catch up.
The Conference Board said last week that companies expect wages to rise 3.9% next year, the highest rate in more than a decade. Job openings remain near historic highs. The labor-force participation rate is well off its pre-pandemic high.
The Build Back Better plan, unless
Sen. Joe Manchin
finally drives a stake through its heart, will, among other things, presumably add significant extra demand for labor to fill all those unionized child-care, education and green jobs. As the Congressional Budget Office helpfully told us last week, it would add $3 trillion to the 10-year deficit, not the $231 billion conjured from the three-card Monte trick of having all its major provisions supposedly sunset after a few years.
So the Biden plan for inflation seems to involve adding to a huge increase in demand while quietly hoping that workers will get further squeezed to avoid a wage-price spiral of the kind we saw in the 1970s. All this while the Fed is so far behind the curve it can’t see the curve.
If it doesn’t sound like much of a plan, don’t worry, it’s only transitory.
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