Is US inflation more than a temporary phenomenon?

Romesh Vaitilingam | Jul 20, 2021

Amid fierce public debates about the size of the Biden administration’s coronavirus protection and stimulus package, one concern that has surfaced is the threat of heavy public spending sparking higher inflation. Although officials at the Federal Reserve have acknowledged that inflation is possible in the short term, many have argued that inflation is unlikely to stay high for long. Chicago Booth’s Initiative on Global Markets asked the members of its US Economic Experts Panel to gauge the likelihood of the US economy “overheating” as a result of the current stance of fiscal and monetary policy.

The results indicate considerable uncertainty and differences in views. The short comments that the experts are able to include when they participate in the survey provide more details on different perspectives.

Among those who agreed that there are risks of prolonged higher inflation, Steve Kaplan of Chicago Booth stated, “Poses a risk, but much uncertainty about whether that risk will be realized,” while his Booth colleague Anil K Kashyap commented, “Poses for sure. We don't know much about how inflation expectations are formed; if they become unhinged, watch out.” Markus Brunnermeier of Princeton adds, “While sharp price spikes might be transitory, they can translate into lasting higher inflation if one isn’t watchful.”

Yale’s Ray Fair points to his own analysis of the issue: “I have a recent paper on this, ‘What Do Price Equations Say About Future Inflation?’ using an econometric approach.” Peter J. Klenow of Stanford also referred to some further reading with a consensus view on inflation prospects: “Modest in magnitude: ~20 bps over the next 5 years and ~10 bps over the next 10 years, according to the Survey of Professional Forecasters.” 

Darrell Duffie of Stanford remarked, “A bit higher inflation would be good. The risk of much higher inflation involves a tradeoff. Better infrastructure, for instance, is needed.” Similarly, Abhijit Banerjee of MIT, who said he is uncertain, noted, “I am not sure that slightly higher inflation would be a bad thing, by the way. The question seems to lean that way.” 

Among other panelists who expressed uncertainty, Judith Chevalier of Yale noted, “The TIP-Treasury spread does not suggest extreme inflation expectations at the moment.” And Chicago Booth’s Austan Goolsbee said, “There wasn’t prolonged inflation with unemployment at 3.5 percent. Why would it be prolonged when, apples-to-apples, it is double that?” 

Kenneth Judd of Stanford pointed to a source of uncertainty: “It is unclear if current conditions indicating overheating, such as the so-called labor shortage, are temporary or important beyond summer.” And Larry Samuelson of Yale returned to the issue of uncertainty about expectations: “It is remarkable that inflation has hitherto been mild. It might be temporary, but inflationary expectations are hard to dampen.” 

Chicago Booth’s Richard Thaler cautioned, “Any strong opinion is misplaced.” And Eric Maskin at Harvard concluded, “There appears to be significant disagreement among experts on this point. I don't know enough myself to say one way or the other.” 

Daron Acemoglu of MIT was uncertain about how the statement describes potential inflationary dangers: “Inflation is undoubtedly more likely now than it has been for 20 years. But the qualifiers ‘serious’ and ‘prolonged’ are too strong.” This perspective was shared by Richard Schmalensee of Yale, who disagreed with the statement, arguing: “‘Serious’ and ‘prolonged’ seem a reach.” 

Several others who disagreed suggested that monetary policy can react effectively should the need arise. Aaron Edlin of the University of California at Berkeley said, “Current policy does not by itself pose that risk because future monetary policy can be changed swiftly.” William Nordhaus of Yale concurred: “Fed can and will react to prevent this syndrome were it to threaten.” And Robert Hall of Stanford, the only panelist to vote “strongly disagree,” stated, “Monetary policy is firmly committed to keeping inflation under control and has the means to do it.” 

Similarly, Columbia’s Jose Scheinkman noted: “Prolonged higher inflation would require a very inattentive Fed.” And Barry Eichengreen of UC Berkeley commented, “If ‘current combination’ means accommodating monetary policy now but higher interest rates if higher inflation materializes, then why ‘sustained.’” 

Finally, James Stock of Harvard looked to potential risks further down the road: “The risk is more at long horizons with our unsustainable debt path, than at one to two years.” 

All comments made by the experts are in the full survey results.