A year ago, economists were debating whether North American and European economies would experience inflation above 2% per annum. Some predicted that inflation would rise but that inflationary pressures would not last long and would be moderate. Many disagreed, and added for good measure that what we were experiencing was not inflation but reflation! Suffice to say that it is now generally accepted that higher inflation is present and the experts have moved on to the next question: how long will it last?
Most central bankers speak with Pythian clarity that this higher inflation will be “transitory.” Few are willing to define the length of “transitory” but, reading between the lines, we may assume that they forecast a period of no longer than 24 months, and certainly not anywhere as long as the high inflation period of the 1970s and early 1980s.
According to most central bankers, the causes of inflation are numerous, including supply chain constraints, logistic bottlenecks, input shortages, government assistance and pent up consumer demand, but will soon abate.
Are most central bankers and their staffs too optimistic? What about the effect of structural changes, such as:
- labor shortages,
- wage increases,
- reshoring,
- geopolitical tensions,
- immigration restrictions,
- climate change and decarbonization,
- outsized budget deficits, and
- unprecedented money supply increases?
Atlanta Fed President Raphael Bostic is reported to have recently banned the word “transitory” when speaking of inflation. I think he is right. The COVID-19 pandemic has accelerated a number of secular changes that will profoundly change our economies and increase the cost of most services and goods. These costs will in turn have to be passed on to consumers for quite some time. The silver lining here is that inflation will erode the mountains of debt being accumulated by governments, thus reducing our debt burden on future generations.