American economists and consumers got inflation wrong during its recent surge. They still do (Michael Hiltzik, Sept. 27, 2024, LA Times)
One can’t really blame a politician for lying about a fundamental fact, any more than one can punish a dog for drinking out of the toilet. It’s what they do.
But Vance’s misstatements point to an important feature of Americans’ thinking about inflation in recent years: We haven’t understood it from the moment it first appeared in early 2021. We still don’t. But no one should feel ashamed, because economists and policymakers have gotten it wrong too.
Let’s start with the most fundamental debate among the policymakers: whether inflation would be “transitory” or long-lasting. The Federal Reserve first used the term in a policy statement in April 2021, after the annualized inflation rate had climbed to 2.6%. (“Inflation has risen, largely reflecting transitory factors.”)
As Fed Chair Jerome H. Powell recollected in a speech last month, “the good ship Transitory was a crowded one, with most mainstream analysts and advanced-economy central bankers on board.” Beginning in October 2021, however, “the data turned hard against the transitory hypothesis. Inflation rose and broadened out from goods into services. It became clear that the high inflation was not transitory, and that it would require a strong policy response.”
The “transitory” camp was ridiculed as Pollyannaish. The “strong policy response” Powell referred to was the Fed’s raising of short-term interest rates 11 times, a total of 5.25 percentage points, from March 2022 through July 2023.
Yet in retrospect, team transitory was right.