The Middle Truth in the Inflation Muddle

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.

This time, however, it is not clear what, if anything, has been learned. Thinking about the causes of our recent inflation, and about why price increases now seem to be subsiding, remains muddled.

The main muddle concerns the role of the Fed. Does it deserve blame for the rise of inflation in early 2021 and corresponding credit for the recent decline?

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