2023-01-13 Markets

A lot is being said about inflation, and in particular about two questions: is the current inflationary bout temporary or permanent, and have central bankers (especially the Fed) made a policy error. The picture above, courtesy of The New York Times, helps us guessing the right answer. Not surprisingly in both cases it’s not what you read in the press.
It’s easy to create controversies when you fail to specify parameters. Thinking of temporary versus permanent inflation, I don’t recall anyone indicating where the line should be drawn: 1 hour, 1 week, 3 months, one year, or longer. Some helpful data; average US inflation in selected periods:
1965 to 1985 (20 years), 6.3%
1985 to today (37 years), 2.8%
2000 to today (22 years), 2.5%
2020 to 2022 (2 years), 5.0%
My vote is for ‘temporary.’
As for the policy error, remember where we were in 2020: we had just lived for the last 20 years with inflation averaging 2.1%, we were all worried about de-flation and the world was ending (COVID). Logically the Fed stated very clearly that they would let inflation run for longer if and when it reappeared. They did exactly what they said. My vote is for ‘no error.’