Inflation

[DaveBrown74]

I am curious if anyone here has a strong view on whether inflation is here to stay in the US, or if it's just a temporary phenomenon.

Plenty of respected economists, including the Secretary of the Treasury and the majority of members of the Fed, as well as a number of prominent Wall St economists, think it is temporary. The argument for it being temporary is basically that supply chains got badly disrupted by Covid, and they have not been able to replenish quickly enough to keep up with the sharp surge in demand of a reopening economy and pent up spending impulses by consumers who were previously locked down and not having as many things to spend their money on. The enormous stimulus pumped into the economy by the government, coupled with interest rates pinned at zero, have only further fueled this demand. But once the supply chains normalize again, and once the extra covid relief aid provisions for people run out, then prices will come down again. That is the argument for it being temporary.

Why would it be more than temporary? Because the Fed clearly seems hell-bent on keeping monetary conditions easy for a long time. This will encourage borrowing and dissuade savings. It will keep asset prices high and debase the currency. An unwillingness to raise interest rates when growth rates and expectations clearly call for higher rates is what classically leads to inflation. There is an argument that these forces are not just temporary but that they are here to stay. Even if the Fed raises rates in a year or so, how quickly will they raise them? The people in charge are extremely dovish, and that seems unlikely to change anytime soon. Based on their rhetoric and their past behavior, it is very hard to envision a scenario where they raise rates very aggressively and quickly.

If inflation gets really bad, then that will surely hurt people and hurt the markets. However some moderate inflation, particularly if it includes wages, won't be the end of the world.

I tend to think that we will see the current pace of inflation level off in a quarter or two, but I don't think it will completely disappear. I think it will remain elevated and above the rate of where it was before the pandemic, and I expect that to coninue for a good long while, not just a couple of quarters. And we'll just have to live with it.

Does anyone have any thoughts on this? Curious to hear other views.

[MightyGiants]

It's really hard to say.  Conventional economic wisdom said we should have seen inflation years ago.    You even left off another major inflation driver which are all the tariffs President Trump imposed.  The same ones President Biden has been slow to rescind.

It's really a mystery as to why we haven't seen much in the way of inflation over the past few years.   I do think that as we come out of the Covid crisis things will be unsettled for a while.   

We have seen the effects of the various Covid stimulus bills but we haven't seen is the Covid financial downsides which have been cans that have been kicked down the road.   In many ways, Covid has played out like the Tale of Two Cities with the haves and the have-nots.    There are people who are in their homes or apartments only by virtue of freezes on evictions or foreclosures.   Eventually, those freezes will end and many of those people are going to be faced with bigger bills than the ones they already couldn't afford.   The same is true with utility bills and protections from shutdowns.

There is also a possibility that the whole Covid crisis creates fundamental changes in our economy.  Things like working from home could become more of a norm.   People avoiding crowds could be a long-term thing.   Does going to dinner and a movie be replaced by Grubhub and Netflix?   Economic changes could impact inflation but I really can't say in what direction