What Is Transitory Inflation? (2) The Politics
The Power of Words
- “Our experts believe, and the data shows, that most of the price increases we’ve seen are temporary.” – President Biden (2021)
- “We have in recent months seen some inflation … I personally believe that this represents transitory factors.” – Janet Yellen (2021)
- “Inflation is likely to be transitory.” – Lael Brainard (2021)
- “Economists continue to believe that higher inflation is transitory.” – Reuters (2021)
- “Transitory has different meanings to different people.” – Jerome Powell
- “Fed officials have worked to clarify that their meaning behind “transitory” inflation is quite different from the public’s.” – Washington Post (2021)
- “Powell admits the Fed got it wrong on inflation, and says they should stop calling it ‘transitory’.” – Fox Business News (2021)
- “Democrats are in a tricky position [having] made a tactical error. Their initial messaging strategy labeled inflation as ‘transitory.’” – The New Republic (2022)
- “I am ready to retire the word transitory.” – Janet Yellen
- “‘Transitory’ has become an embarrassment.” – The Financial Times
- “It’s been a rough year for “team transitory.” – Fortune (2022)
- “‘Transitory’ has become a swear word to my staff and me over the past few months.” – Raphael Bostic, Head of the Atlanta Federal Reserve
- “Maybe ‘transitory’ is just a bad word.” – a Fed economist, quoted in the Washington Post (2022)
- “We can step back from what word we should use or whether it’s a good or bad word.” – Mary Daly, Head of the San Francisco Federal Reserve
- “Transitory isn’t such a bad word when we’re talking about inflation, after all. It is staging a quiet comeback that could get louder over the next several months.” – The Toronto Globe & Mail (2023)
The Facts, & Beyond
“Inflation” is more than just a neutral (if flawed) metric published by the Bureau of Labor Statistics. It has become a political football, especially when the word “transitory” is attached. Whatever else it is, “transitory” – the Financial Times’ “word of the year” for 2022 – is a warning sign that what may look like an argument about an economic fact is actually a ideological mousetrap.
The previous column laid out the factual components of “transitory inflation” – what the phrase means as a description of price trends in the economy.
To recap – the most essential fact about “transitory inflation” is that it is driven principally by supply-chain constraints. External shocks cause bottlenecks which cause shortages which cause (temporary) price spikes.
This is an accurate description of recent price trends. Today’s “inflation” is not caused by overheated consumer demand, nor by excessive fiscal stimulus, nor by loose monetary policy, nor by “de-anchored” consumer expectations about future price increases. Inflation may not be “always and everywhere” a supply-chain phenomenon – but it is clearly so in the current situation.
Accepting supply-side causality, all the rest follows. “Transitory” inflation is temporary, self-correcting, and most importantly, there is nothing the Federal Reserve can do about it. There is no tool in the monetary policy toolkit that can have any effect on the supply of eggs or semiconductors or used cars.
But the political dimension of the inflation debate has assumed prominence in the public discourse. The shift from economic analysis to partisan politics probably can be dated from last year’s rise in gasoline prices (a typical psycho-political trigger issue). At some point in 2022, the President’s approval ratings began to correlate with the “pain at the pump.” Calling inflation “transitory” began to seem like the label for a particular political agenda, one which polarized supporters and opponents, and distorted the analysis of the monthly inflation updates.
How did we get here?
The Origins of “Transitory”
Jerome Powell first floated the term in May 2019, and it immediately caught the attention of Fed watchers –
- “It only took one word from Fed Chairman Jerome Powell on inflation to send the markets reeling, and that word was ‘transitory’… ‘We suspect transitory factors may be at work,” Powell said, adding inflation should return to the Fed’s target over time.”
- “Transitory was word of the day.” [said a banking executive]
Interestingly, in 2019 Powell invoked “transitory” to “explain” and discount the apparent absence of inflation:
- “Powell downplayed a recent slide in U.S. inflation, saying ‘transitory’ factors may be dragging it down. ‘I don’t mean to diminish concerns about too-low inflation, but I think there’s good reason to think that these low readings are particularly influenced by some transitory factors.’”
The context for Powell’s comments was the declining rate of inflation just prior to the pandemic shock.
Inflation in 2019 was running far below the Fed’s target. Powell’s “transitory” trope was actually intended to quench any short-term expectations of a rate cut. (It is ironic that “transitory” – which started out as Powell’s way to discount too-low inflation – later morphed into an inflammatory phrase to describe his alleged complacency about too-high inflation and reluctance to sanction rate hikes.) In any case, in the medium term Powell’s stay-the-course message in 2019 was a balm to the markets, which are generally allergic to Fed activism. The S&P 500 index was up 10% over the following six months.
“Transitory” In Decline
The sedative had a short shelf-life, however. In March of 2021, the CPI finally crossed above the Fed’s target for the first time in several years since the pandemic shock. The rate of monthly increases ramped up sharply, reaching 5% (year over year) by June, and 8% by early 2022. The media grew restive. “Transitory” became the label for what looked like the Fed’s complacency, if not dereliction of duty.
“Experts” began to weigh in. Mohammed El-Erian was particularly caustic.
- “The characterization of inflation as transitory is probably the worst inflation call in the history of the Federal Reserve, and it results in a high probability of a policy mistake…The Fed must quickly, starting this week, regain control of the inflation narrative and regain its own credibility,” he added. “Otherwise, it will become a driver of higher inflation expectations that feed onto themselves.”
Olivier Blanchard, think-tanker and former chief economist for the International Monetary Fund, objected for more technical reasons, drawing a connection with labor costs that (in his view) invalidated the “transitory” premise:
- “My interpretation of the evidence is that when there is little action in labor costs, and most of the [CPI] movements are either noise or transitory, and [we] may just ignore these short-run movements. But this will not hold if there is a large and sustained increase in wages.”
And for Larry Summers, “transitory” was beneath contempt. His “snarling, alpha-male” op-ed in The Washington Post in November 2021 was titled: “On inflation, it’s past time for team ‘transitory’ to stand down.” He called the policies based on the transitory premise…
- “…the least responsible fiscal, macroeconomic policy we’ve have had for the last forty years.”
The Fed’s error threatened dire consequences.
- “An overheating economy… will metastasize and threaten prosperity and public trust.”
All this was a pre-condition for the public and politicians to begin picking sides.
The Politicization of “Transitory”
The discussion took on a partisan aspect. “Teams” formed, left and right.
- “The description of inflation as “transitory” became highly politicized, especially as the term was adopted by members of the Biden administration. Janet Yellen said ‘I expect all of this to be transitory, and I think the economy’s going to get back on track. I don’t anticipate inflation is going to be a problem.’ On Twitter, economists and commentators began using the hashtag #TeamTransitory to represent this administration-endorsed view of inflation. The opposing view, sometimes called #TeamPermanent or #TeamPersistent, was more often (though not exclusively) propounded by right-leaning economists and media.”
The Brooking Institute studied the party affiliations of both sides. In general,
- “…consumers typically have lower inflation expectations when their preferred party is in control of the White House. This likely reflects many consumers’ tendency to associate ‘good times’ in general with low inflation. During the Obama presidency, Republicans had higher inflation expectations than Democrats. This partisan gap reversed when Trump was elected. Democrats’ short-run inflation expectations were about 1.3 percentage points higher than Republicans’ throughout the Trump presidency.”
- “When Joe Biden was elected, the partisan gap reversed again. And as inflation rose, the gap began to widen. By the end of 2021, the short-run inflation expectations of Republicans were 5.5 percentage points higher than those of Democrats. Long-run inflation expectations of Republicans were 2.1 percentage points higher than those of Democrats.”
Brookings also found that
- “Democrats were nearly universally on #TeamTransitory.”
Republicans meanwhile have grown increasingly skeptical of what they understand “transitory” to mean.
- “‘I know you believe this is transitory. But everything is transitory. Life is transitory,’ [Senator] Toomey [R-PA] told Powell. ‘How long does inflation have to run above your target before the Fed decides maybe it’s not so transitory?’”
Thus, the politics of “transitory” came to overshadow any sense of economic reality.
The Fed Capitulates (Halfway)
And so, the Fed retreated, or pretended to.
A week after Summers published his rant, the authorities began backpedaling.
- “We are acknowledging more uncertainty about transitory. I think it’s probably a good time to retire that word.”(Jerome Powell, Nov 2021)
- ““Transitory’ is a dirty word. You’ll notice I brought a prop to the lectern. It’s a jar with the word ‘transitory’ written on it. Say ‘transitory’ and you have to put a dollar in the jar.” (Rafael Bostic, Atlanta Federal Reserve)
Nevertheless, Powell and others seem to have remained convinced that the cause of the inflationary episode lay in the realm of supply-side theories, and would prove to be…well, transitory.
- “Powell has decided to retire the phrase. He and the other major central banks have, however, stuck by their analysis — if not the word — and expect inflation to come down by the second half of 2022.” – The Financial Times
Some Fed officials sought refuge in synonyms. The President of the Atlanta Fed proposed “episodic” –
- By episodic, I mean that these price changes are tied specifically to the presence of the pandemic and, once the pandemic is behind us, will eventually unwind, by themselves, without necessarily threatening longer-run price stability. In this sense, then, we might anticipate the prices of rental and used cars, lumber, and other demand-specific items to revert toward their prepandemic levels. Indeed, we have seen the beginnings of such reversions, which some could take as evidence that the use of that word is correct and fully appropriate.
Note that this definition conforms closely to the factual matrix for the term “transitory” described in the previous column. The change is a matter of rhetoric, not substance.
A Bloomberg columnist declared he was “tired of hearing that the current spike in inflation is “transitory” — not because I doubt the underlying economics of the claim, but because the ever-more-common usage is devaluing a precious word.” [My emphasis.]
Even as inflation accelerated, Powell defended his true position in Senate testimony:
- “Inflation has increased notably in recent months. This reflects, in part, the very low readings from early in the pandemic falling out of the calculation…”
He continued, and did not refrain from using the forbidden word:
- “The pass-through of past increases in oil prices to consumer energy prices; the rebound in spending as the economy continues to reopen; and the exacerbating factor of supply bottlenecks, which have limited how quickly production in some sectors can respond in the near term. As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.”
In another Senate exchange, Powell expanded on his view that the post-pandemic inflationary episode has been driven by supply constraints – which is what he has always meant by “transitory” –
- So on inflation, why did we say transitory? We said that because we thought that the supply side bottlenecks and shortages would be alleviated much more quickly than they have been. There’s no empirical experience with this before, we haven’t had the global supply chain collapse. We haven’t had this kind of a labor force shock before so we and essentially all other mainstream forecasters forecasted that by now we’d be seeing much lower inflation. The supply side constraints have been very persistent and very durable… Look at our ports…
The “Improbable Comeback” of Transitory
Prices surged in the first half of 2022. The year over year CPI ran above 8% for 8 straight months.
But then, abruptly, the fever broke. Inflation eased decisively in the 2nd half of the year – averaging at or below the Fed’s target in the last six months of the year.
Consternation developed in the commentariat. The most simplistic responses simply repeated the monthly headline CPI figures – which were still elevated on a year-over-year basis. Some decided that even if inflation seemed to be declining, it might still only be “long-term transitory” – and still blamed the Fed for poor messaging, and political clumsiness.
- “The political aspect of the Fed not being willing to admit this will be a painful ride and thus remove the ‘transitory’ qualification because this doesn’t apply in the short term but only in the long term.”
James Bullard, head of the St Louis Federal Reserve straddled the issue in another way:
- “Some of the inflation is transitory, but not all of it.”
It’s had to know what that might mean, or how it could inform policy.
But the picture is becoming clearer. The Wall Street Journal finally declared in January 2023 that “inflation is turning the corner.”
- “Much of inflation’s rise appears to have been transitory after all… Just as the U.S. got used to thinking high inflation could be here to stay, signs are emerging that most of the surge through 2021 and the first half of 2022 was actually transitory—as Federal Reserve officials first thought.”
Even Larry Summers conceded that “yes, absolutely, if inflation comes all the way down [the Fed’s policy stance – based on the “transitory premise”] will look much better than I thought six months ago. That is a real possibility, not yet in my view a probability.”
A recent appraisal enjoyed the irony of Summers’ grudging recantation —
- “In 2021, Larry Summers Won the Inflation Debate. But His Victory Was Transitory. While there isn’t yet anything like a consensus, it seems increasingly likely (to me, at least) that posterity will judge Summers to have been wrong and his bête noire, ‘Team Transitory,’ right about inflation after all.”
The cautious new consensus emerging now (Q1 2023) is typified by this from the Toronto Globe and Mail –
- “Those who labelled the inflation upsurge of 2021 and early 2022 as ‘transitory’ ended up with egg on their faces. But the CPI’s behavior in recent months suggests that at least some of what we’ve gone through on the inflation front was indeed befitting of that label, if we waited long enough.”
Is The “Transitory” Verdict now “Settled Science”?
Hardly. For one thing, the phenomenon of inflation is still too poorly understood to qualify any causal interpretation as “settled.” There are too many theories, too much wiggle room between them, too many problems with the data, and too many flaws in the methodologies for measurement – that prevent us from declaring a decisive verdict. Still, it does not seem that Mr. Powell was right all along, even if he was forced to dissemble temporarily. (A transitory dissembling.)
Many are still in the anti-transitory camp.
- “Paul Hollingsworth, chief European economist at BNP Paribas, warned investors on Monday to beware the return of “Team Transitory”… ‘Reviving the “transitory” inflation narrative might seem tempting, but underlying inflation is likely to remain elevated by past standards,’ Hollingsworth said.”
And… the world still turns, and turns unexpectedly. A week ago there was speculation that the Fed would increase the next rate hike back to 50 basis points. Then Silicon Valley Bank messily committed corporate suicide and suddenly there is doubt as to whether there will be a new rate rise at all.
The U.S. economy has been in an oscillating mode since the pandemic shock three years ago, compounded by the Ukraine war, the massive waves of fiscal stimulus, and large-scale experiments in “unconventional monetary policy” (in both directions). We await with apprehension the outcome of trends in China (the end of zero-Covid, the Taiwan threat), the possibility of a recession, Putin’s next move, and so on. There are several trends that would favor a forecast for a more structural form of inflation in the coming years (a topic for the next column). So, although the current inflationary episode appears to have been a temporary one in many respects, it does not mean that the next chapter will follow the same script.