Some thoughts on inflation. Bond market participants rode a multi-decade deceleration in inflation. That came at a cost over last two decades as wages decelerated as well. Some of gap between men and women was closed bc male-dominated (mfg & construction) jobs fell.
The Fed has shifted its stance on inflation. It has said 1) It would “look through” - not raise rate later - a transitory flare in inflation. This will come in 2 ways - inflation measures get easier to beat, starting in Mar, as prices decelerated/dropped as crisis hit yr ago.
The Fed shouldn’t be curbing the recovery to contain inflation that is a result of a technicality triggered by the crisis. It should abate. However, just as those “base effects” as they are called play out as we move into summer, we could see flare in prices tied to reopening.
Airfares and hotel rooms rates - which are set by algorithms designed to jump w demand ensure it. We also know from manufacturing and construction that it is easier to idle (turn out the lights) on capacity than reopen. Bottlenecks are a given.
The Fed has said it will also look through this flare in inflation. They are assuming it will be transitory and bottlenecks will be worked out before labor markets tighten to the point wages really start to pick up and workers can demand to be compensated for those increases.
The Fed has also said it will wait for employment gains to become more inclusive, wages to rise and inflation to rise above its 2% target for a while. This buys them better economy w/less risk of deflation. Rates will be justifiably higher - allows more leeway to cut next time.
Not a bad bet given the lack of bargaining power & low wages workers yield. But, let’s say they are wrong and employment gains are more inclusive and a red hot economy pulls people out of the woodwork faster than expected. Workers regain bargaining power & wage accelerate.
Then hallelujah - the Fed raises rates to tame inflation sooner than they expect. I am assuming that the Fed is much less “patient” than they were in the 70s, when they added to inflation pressures by acquiescing to political pressure from Pres Nixon to ensure ‘72 election win.
But wait, even if the Fed cuts off the kind of vicious cycle we had in the past, the bond market is still mad. We could be in a world where inflation is more prevalent than disinflation or deflation, even if inflation is returns to 2% range. It’s been below that for a decade.
Other important issues. A lot of the world is behind us on vaccines. That means disinflation still prevalent across much of world. Moreover, upward pressure on goods prices - think vehicles and everything related to housing - should abate as we rotate back into services.
This doesn’t mean that a more persistent inflation is not a risk. It just means that it is probably a risk worth taking to recover more ground faster. We have already lost more than a year of GDP to the crisis and employment gains tend to lag GDP - some jobs have been automated
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