In 2021, when inflation started to take off, there were two opposing sides: Team Transitory and Team Structural. In particular, Team Transitory believed that taming inflation didn't need a lot of help from the Fed because it was fundamentally the result of temporary pandemic supply shocks that would fade on their own.
I've been on Team Transitory consistently from the start because I think nearly every scrap of evidence points in that direction. But every single member of Team Transitory—including, ironically, me—made a big mistake. We forgot Kevin's Law: "Everything takes longer than you think."
This law holds for a startling range of seemingly unrelated human activity: house building; software development; World War I; housing bubbles; artificial intelligence; planning a party; and on and on and on. It's almost like some kind of cosmic law of nature meant to mock us.
In any case, our initial notion that the inflationary burst would last nine months or so was laughable. We all should have known better. There's absolutely no support in the historical record for such a short inflationary episode in the US:¹
Transitory or not, there was never any chance that the pandemic inflation episode would last nine months. It was always going to last a couple of years, and sure enough it has.
¹Episode lengths are measured over the time it takes to get above 4% and then back down below 4%. I fudged slightly to distinguish the 1974 and 1980 episodes.
What about 2007?
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Great chart! What’s shocking to me is that the Feds inflation target of 2% or lower has been a rare occurrence over the last 70 years. Seems like healthy economies can handle 3-4% with commensurate economic growth.
The target does not arise from US Fed, it is actually something that came out of New Zealand and there has been for the past decade in Central Banking circles quite the discussion that the target likely should be in fact in the 3-4 range.
However, this is an evolution that will occur after inflation is mastered.
the whole point of the of the inflation debate was not the specific amount of time it took but whether the higher inflation rate was structural and basically permanent or whether it was driven by exogenous shocks. watching "team transitory" mea cupla because it took a little longer that people seemed to expect has been bugging me for months. we were right. it seemed obvious the whole time to me.
Amusing the just so story, but no that is not accurate, the words permanent nor structural.
i truly have no idea wtf you're talking about. are those words intended to make some sort of sense?
The teaching of the King's English in the mother country ain't what it used to be. Lol.
I don't like predictions because they bias how you look at things. You begin rooting for or against the prediction being right instead of observing what's going. So I tend to avoid making predictions. But I do remember saying a number of times that the recent bout of inflation has more in common with pre-'70s inflation spikes than inflation during the '70s thru '90s (which tends to get lumped together into one big high-inflation era, the only one that non-geriatrics have living memory of, which is one reason people had a freak-out, even people that should have known better).
Earlier inflation spikes, going back to WWI at least, look more like that early 1950s spike. Most lasted 1 to 3 years. What each had was a huge change in the type of economy that we had. In most of those cases, the country transitioned from peacetime to wartime, or vice versa.
The recent spike came during peacetime, as the country and world made the biggest economic transition since at least mid-century, imposing and then lifting emergency measures in response to the pandemic. Look at the big picture and you can see it: Of course, we were going to have a spike in inflation. Also: It'll last 1 to 3 years and then we'll have a new normal.
I think people (like members of the Fed) still need to understand the new normal won't look like the 2010s, with inflation rarely and barely hitting the target of 2%. I wouldn't be surprised if 3 to 3.5% becomes the new average. That's more like the long-term normal than the past decade was.
What we need is more focus on growth than austerity. Pandemic spending and Biden so far have been a good start. We'll see how that goes.
The boomer generation suffered through 3 periods of really bad inflation during their first 10 or so years of their earning lives. I wonder what effect that has had on their ability to earn and save over their careers.
It was almost certainly at least mildly positive in that the real value of their mortgage debt and students loans eroded rapidly.
> We forgot Kevin's Law: "Everything takes longer than you think."
(Cough...) Um... Hofstadter's Law. You can't truncate it and name it after yourself!
Hofstadter's Law: It always takes longer than you expect, even when you take into account Hofstadter's Law.
Source: https://en.wikipedia.org/wiki/Hofstadter%27s_law
Yep. Sorry, Kevin. If you wanted that one, you should have gotten yourself born earlier.
And a series of "transitory" events too.
The Fed will want to take all the credit. That's fine if they also declare victory and go home. I was expecting the rate hikes to have had a much more negative effect on the economy by now. But Biden's jobs programs have kicked in pretty quickly, so have counteracted the Fed?
“The Fed will want to take all the credit.”
That’s probably to be expected. But as Krugman argues today, that’s not easy to justify. Just as likely, the Fed had nothing to do with it.
https://twitter.com/paulkrugman/status/1679848416312958978?s=46&t=ItVtC79AmXYdssEcGGydmg
The Fed did not end any of those previous episodes within three months from the time it began raising federal funds. It did not do so this time either.
It was always temporary insofar that the causes of the exogenous inflation had to be resolved. I did say that last summer, quite clearly.
Also, the Fed balance sheet had far more power than their rate changes on inflation, IMO.
Also...
Exogenous ---> ZLB
Okay, so the current inflationary episode has been shorter than the previous four episodes. Why not give the Fed some credit for that?
By the way, do you know who was on Team Transitory from March 2021 through December 2021? The Federal Reserve! They sat and did nothing for nine months while inflation was on a tear. (Good for them, I say. It was a time to wait and see.) Then in December 2021, Powell came out and said, "Ahem. So maybe we do need to raise interest rates. We'll get moving on that soon, and have several increases for you throughout the next year." (I'm paraphrasing.) Really, there was nothing shocking or sudden about the increases that finally came. Also by the way, who says now that there was no alternative to those rate increases? Paul Krugman.
The increases were the steepest rate increases we have ever seen and the Fed is talking like there are more increases coming in the near future.
The debate was never over whether the Fed should have raised rates at all. I haven't seen anyone claim that the Fed should still be sitting on 0% rates.
The debate was over the magnitude and speed in which they raised them and that they continued to raise rates even as inflation eased.
Thanks for this reply. Zero percent is not normal, I guess we agree. And an interest rate that only matches the current core inflation rate is a real rate of zero. The federal funds rate is barely above that now.
The rate was raised at an appropriate speed and to an appropriate level, in light of the magnitude of the inflation surge of 2021–22 and the Fed's year-long delay in beginning to address it. I'll say again, the delay was prudent, but when the danger of entrenched inflation grew clearer, decisive action was called for. And while the rate of inflation backed off from 6 percent to 4 percent after a while, that wasn't the policy goal.
Nevertheless, the Fed's collective judgment now is that they've just about done enough with the federal funds rate. Once again, it might be time to wait and see. But the rate can be decreased as easily as it was increased if economic growth starts to stall.
Then in December 2021, Powell came out and said, "Ahem. So maybe we do need to raise interest rates.
If anyone should thank Powell it's probably going to be Joe Biden. I'm increasingly on Kevin's side here: it was transitory in nature and eventually would have righted itself (I see little evidence inflationary psychology was likely to have become embedded).
But I also think it's possible we can have inflation that is A) transitory in nature but also B) "artificially" shortened by monetary policy. My sense is this is in fact what has transpired.
And the truncation of this inflationary episode is probably helpful for Joe Biden's reelection prospects.
Looking at that chart I have to wonder if 1970, 1974, and 1980 we three discrete events as much as one, long event starting circa 1960.
Trying to separate '74 from '80 sort of diminishes why the Fed had to come down so hard in '80. Inflation had been bad for almost 7 years at that point and there didn't seem to be any light on the horizon. The two oil shocks were a brutal one-two punch. This episode had nothing like that.
Transitory or not, I don’t think you’re getting your cheap money back any time soon.
We never had such a massive increase in spending as we did in 2020 and never had such a massive disruption of the supply chain as we did with Covid.
The four most dangerous words in the English Language is "This time is Different."
Except This Time was DIFFERENT.
“Everything is transitory. It’s just a matter of waiting long enough” …
You're catching on now!