eichengreen187_ Alex WongGetty Images_jeromepowell Alex Wong/Getty Images

The Middle Truth in the Inflation Muddle

Critics of the Federal Reserve argue that the acceleration of US inflation in early 2021, and the rapid disinflation of recent months, had nothing to do with monetary policy, because the sources of above-target price growth were all on the supply side. This view is both right and too simple.

BERKELEY – For precisely three years, the economics profession has been collectively fixated on inflation. February 2021, exactly 36 months ago, was the last time consumer-price-index inflation in the United States (all items, 12-month percentage change) was at or below the Federal Reserve’s 2% target.

This recent episode of above-target inflation now shows signs of being over. “Shows signs” is of course code for the fact that you never know. A further shock – ructions in financial markets or a major geopolitical event, for example – could still throw the disinflation trend off course. So far, however, that course appears to be heading directly toward 2%.

One would hope that we learned something from these painful three years. Sharp increases in prices have served as catalysts for advances in inflation management in the past. From some episodes we learned the importance of preserving the independence of the central bank so that it can react unrestrained by political considerations. From others we learned that central banks need to establish a hierarchy of policy priorities and to communicate those priorities to financial markets and the public.