> Now we are seeing the effects of that offset being removed.
You realize that inflation is back at baseline, right? Were those effects added back to the economy somehow and I missed it?
I remain amazed that people continue this argument: the "transient" camp was correct. Inflation came, for largely the reasons that the boring economists[1] said, and went away, likewise. No one is going to be able to claim to have a good numeric model on this stuff (feedback systems are hard), but if nothing else the "Here is a Simple Rule to Explain Economics that Confirms all your Priors" rhetoric should be ejected, right?
[1] As opposed to the partisan axe grinders. Next time, maybe believe the tweedy professors in preference to the talking heads?
I don't think economists or politicians every properly defines transitory in this context, though the concept was used as a marketing play to paint a picture of prices coming back down.
We saw that in very limited cases, but prices broadly are still higher than before and it isn't realistic to expect prices to comeback down The only real argument is if we compare against absolute highs in price shocks due to panic toilet paper buying, baby formula production issues, etc.
So... none of that is correct. "Inflation" is a growth exponent, not an absolute measure of prices. No one ever promised "prices would come down", because that would be deflation (a negative exponent).
Inflation is just a rescaling. Everyone loves to say it's not, but it is. Prices are higher and wages are higher and assets values are higher. It all happens together, though not in perfect lockstep.
If people wanted to complain about real (where "real" means "inflation-corrected") wages falling, they would be screaming about it, because that would be terrible. Except that real wages are INCREASING and have been pretty steadily all through the inflation burst.
Last US CPI report was 3.7% YoY and a little better than that in seasonally-adjusted monthly numbers. That's well inside one standard deviation of the historical average (which is something like 2.9% I think). There's space for yelling about specifics within the economics community, but the current conditions are absolutely not consistent with a description of "high inflation" that matches the rhetoric being deployed above.
My division says 28% higher than historical average? Are you trying to cite a different number? Look, seriously, please stop: inflation is not high. Period. It's in a range that we would have considered perfectly normal at almost any time in the last hundred years.
The only reason people are bent out of shape about it is that it was high, briefly, for about 11-13 months or so, and they internalized the debate about it based on a partisan frame that's very difficult to escape. But please try.
I think this is now unprovable. "Transient" and "transitory" were never given a precise definition by the central bankers who began using those terms, but when around 2021 when the term was being used by the Fed, it was used in context to refer to inflation that returns to target by itself, without requiring a hawkish policy intervention by the Fed. As the Fed has now strongly intervened, it's almost impossible to investigate the counterfactual of whether inflation would have returned to 2% without their having done so.
> Federal Reserve Chair Jerome Powell suggested Thursday that inflation will pick up in the coming months but that it would likely prove temporary and not enough for the Fed to alter its record-low interest rate policies.[...] “We think our current policy stance is appropriate,” Powell said.[...] Once price declines that occurred about a year ago when the pandemic began are removed from the year-over-year calculations, inflation will temporarily rise. But the Fed won’t see either of those trends as worrisome increases that would force them to change their policies, Powell said. “If we do see what we believe is likely a transitory increase in inflation, where longer-term inflation expectations are broadly stable, I expect that we will be patient” about making any changes, he said. Higher inflation is unlikely to persist, Powell said, because most consumers and businesses expect mild prices gains, and therefore will keep their prices and wage demands in check. [1] (March 4, 2021)
> Powell: "Overall inflation remains below our 2 percent longer run objective. Over the next few months, 12 month measures of inflation will move up as the very low readings from March and April of last year fall out of the calculation. Beyond these base effects, we could also see upward pressure on prices if spending rebounds quickly as the economy continues to reopen, particularly if supply belt bottlenecks limit how quickly production can respond in the near term. However, these one-time increases in prices are likely to have only transient effects on inflation. The median inflation projection of FOMC participants is 2.4% this year and declines to 2% next year before moving back up by the end of 2023.[...] With inflation running persistently below 2% we will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer term inflation expectations remain well anchored at 2%. We expect to maintain an accommodative stance of monetary policy until these employment and inflation outcomes are achieved. With regard to interest rates, we continue to expect it will be appropriate to maintain the current 0 to 1/4% target range for the federal funds rate until the labor market conditions have reached levels consistent with the committee's assessment of maximum employment and inflation has risen to 2% and is on track to exceed 2% for some time. I would note that a transitory rise in inflation above 2%, as seems likely to occur this year, would not meet this standard." [2] (March 17, 2021)
> Powell, however, downplayed concerns that these trends could trigger sustained high inflation. He said he expects supply bottlenecks to cause only temporary price increases. “An episode of one-time price increases as the economy reopens is not likely to lead to persistent year-over-year inflation into the future,” he said. Clogged supply chains won’t affect Fed policy, Powell said, because “they’re temporary and expected to resolve themselves.” [3] (April 28, 2021)
> While much of Wall Street is ringing alarms about out-of-control inflation, Federal Reserve Chair Jerome Powell and his colleagues are expressing confidence in a more benign outlook. Acceleration in U.S. price growth this year will have “only transitory effects on underlying inflation,” Fed Vice Chair Richard Clarida said Wednesday, playing down that consumer prices climbed in April by the most since 2009. Governor Lael Brainard said the day before that officials should be “patient though the transitory surge.” Powell has made the same argument. While policy makers expect the Fed’s preferred measure of inflation to rise to around 2.4 per cent this year as the economy reopens and the pandemic recedes, they forecast it to return to their 2% goal for 2022. [4] (May 13, 2021)
> I think this is now unprovable. "Transient" and "transitory" were never given a precise definition
It was low. Then it was high. Now it's "slightly above average". That seems like a good enough definition to any reasonable person not otherwise polluted by an agenda. You can cherry pick areas where the illuminati were wrong, because you can always do that. But they were, well, less wrong than you were. So that's something, right?
The contention I responded to upthread was that we were somehow in a new historical era of high inflation, owing to a particular set of partisan policy arguments. And that's wrong. Period. We aren't. We just aren't, and you can see that too, right?
I wasn't cherry picking; those quotes weren't to show that they were wrong, but rather to back up my claim regarding the sense in which they used "transitory" and "transient" to mean inflation that was brief enough that policy action would not be required. Nor do I have any opinion on US partisan policy arguments, as long as it doesn't involve bailouts for overleveraged institutions.
And no, that definition is too simple. There are several camps here, and several ways to be wrong:
A) Inflation will be transitory, therefore, we don't need to worry about it, and the Fed can keep interest rates low.
B) Inflation will be transitory, because even if it starts getting out of hand, monetary policy will take appropriate action to bring it back to target, no matter how painful.
C) Inflation will not be transitory unless central banks take unprecedented action. I don't know if they will do that or not, but they should.
D) Inflation will not be transitory, because central banks aren't going to tighten monetary policy. It would be too painful. Because they will keep real interest rates negative, inflation will continue.
E) Inflation will not be transitory, regardless of what monetary policy does in response. We're on the path to never-ending Argentinian-style inflation.
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As the quotes (and the bond market) show, (A) was the common view among institutions in 2021, including central banks, and a lot of the pushback against inflation being "transitory" was in opposition to this view. The usage of "transitory" to justify continuing stimulative monetary policy indicates that Jerome Powell was firmly in camp (A) until at least late 2021. This was very concerning to many people who thought that inflation was much stronger than the central bank anticipated, and monetary tightening would be needed, and this is what drove most of the agitated commentary saying "they're wrong about it being transitory!", including mine. The Fed appears to have eventually come around to that view, right or wrong. It is now difficult to disentangle (A), (B), and (C), because between 2021 and now, monetary policy pulled an abrupt U-turn that roughly coincided with the start of disinflation, which all the (B), (C), (D), and (E) camps were pushing for. (D) and (E) are arguably disproven by the data, unless we see another big round of inflation. But since many of the "inflation is not transitory" voices were in camps (B) and (C), those viewpoints are not unsupported by the data so far.
I, for one, was never in camp (E), but I was in camp (D) until the Fed eventually changed my mind.
You realize that inflation is back at baseline, right? Were those effects added back to the economy somehow and I missed it?
I remain amazed that people continue this argument: the "transient" camp was correct. Inflation came, for largely the reasons that the boring economists[1] said, and went away, likewise. No one is going to be able to claim to have a good numeric model on this stuff (feedback systems are hard), but if nothing else the "Here is a Simple Rule to Explain Economics that Confirms all your Priors" rhetoric should be ejected, right?
[1] As opposed to the partisan axe grinders. Next time, maybe believe the tweedy professors in preference to the talking heads?