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January’s headline inflation of 7.5% was the highest in the United States in forty years. Consistent with previous months, the biggest driver of higher prices was energy, rising 27%, but cars and groceries (especially proteins) also pressured the numbers.
While Fed Chairman Powell had retired the word “transitory,” he and other officials have stopped short of characterizing the inflation as “persistent,” a phrase loaded with negative connotations for economic historians. Rather, what economists and business practitioners now seem to be invoking is a pricing plateau, a one-off re-leveling, resulting from the unleash of post-pandemic demand combined with a lag in supply. Because of lockdowns, travel restrictions, vaccine mandates, recently reimposed energy regulations, and other sources of supply chain disruptions, aggregate supply has fallen, but will eventually rebound.
In this view, inflation emerged from pandemic-related fiscal stimulus and economic reopening, which roused demand more quickly that supply could recover. Illustrating the point, Jackson Hole Economics’ Alex Friedman and Larry Hatheway argue that the dramatic rise in “prices and wages reflects a massive – but one-time – shift in demand relative to supply. … It is a misdiagnosis to confuse a one-off rise in the price level for … inflation.” Once these forces rebalance, inflation should abate, and prices stabilize.
I take a contrary view…