Mystical Hold of ‘Transitory’ Tempts Huge Fed Error

When inflation started to rise earlier this year, many central bankers were quick to call it “transitory,” asserting that it would dissipate soon. Over the course of 2021, however, neither the quantitative forecasts nor the arguments cited in support of this hypothesis have held up. Yet, in stark contrast with the mindset of corporate leaders who are dealing daily with the reality of higher and persistent inflationary pressures, the transitory concept has managed to retain an almost mystical hold on the thinking of many policy makers. The longer this persists, the greater the risk of a historic policy error whose negative implications could last for years and extend well beyond the U.S.

Initially, the rationale for transitory inflation relied heavily on the quick expiration of both statistical base effects and initial supply-demand mismatches as economies restarted after the sudden stop induced by Covid-19. It minimized — or, more accurately, ignored — the possibility of deeper structural factors such as the rewiring of supply chains and changing attitudes toward work. It also ignored the possibility of renewed economic disruptions caused by a variant-fueled resurgence in Covid infections.