How should we think about “transient inflation”?

Here’s Matt Yglesias:

One definition of transient inflation is higher than normal inflation that will soon return to normal (say 2%.) That’s probably the definition this is most consistent with how we normally define terms like “transient”. But I don’t think it’s the most useful definition, the definition that gets at the question that we actually have in our minds.

Whether inflation is temporary depends on what the Fed does in the future. But surely people have something more than future monetary policy in mind when they contemplate whether a given bout of inflation is transient. For instance, the Fed is equally capable of stopping a demand-side inflation like 1966-69 as it is in stopping a temporary bout of supply-side inflation (such as 2007-08). Nonetheless, these two inflations seem intrinsically different in some sort of important way.

So here’s my proposal for a more useful definition of “transient inflation”. A transient inflation can be brought back to 2% relatively quickly without triggering much higher unemployment. Inflation that is not transient can also be brought back to 2%, but doing so quickly will trigger much higher unemployment. It’s like the difference between an illness that will quickly pass away on its own, and an illness that requires painful medical treatment. Both are temporary, but only the former is transient.

If you are wondering whether nominal wage inflation plays a role here, the answer is yes. Be very wary of people who react to rising nominal wages by saying, “Finally! Workers are getting a raise.” What matters is real wages, which are not doing well in recent months. We would like to see a higher long run growth rate of real wages, whereas we would not like to see short run spikes in nominal wage growth.

PS. I used to like reading Yglesias. Now I hate him:



26 Responses to “How should we think about “transient inflation”?”

  1. Gravatar of Effem Effem
    14. July 2021 at 09:33

    I don’t understand the notion of “getting back to 2%.” If there is a one-time overshoot in the price level, doesn’t the Fed need a corresponding undershoot in order to fulfill it’s mandate?

    In today’s hearing, Powell made it seem as though the Fed is willing to tolerate nearly any increase in the price level as long as they believe it’s temporary. I don’t think he understands AIT.

  2. Gravatar of John Hall John Hall
    14. July 2021 at 09:42

    Perhaps Tombstone is too low brow for you, but your PS made me think of “Evidently Mr. Ringo here’s an educated man. Now I really hate him.”

  3. Gravatar of ssumner ssumner
    14. July 2021 at 10:42

    Effem, I meant getting back to an average of 2%.

    John, Nothing is too lowbrow if it’s good.

  4. Gravatar of Louis Woodhill Louis Woodhill
    14. July 2021 at 14:30

    Everything trades against everything else so, as long as the CRB Index remains below its 10-year average, excessive price index inflation can’t continue for very long.

    If the Fed were to bring the CRB Index up to 300 (from 213 today) and keep it there forever, the PCE deflator would catch up to where it would have been if the Fed had achieved its 2.00% inflation target since January 2012. The PCE would then continue to increase at 2.00 to 2.30%/year.

    Stabilizing the CRB Index would have the virtue of permitting the economy to achieve whatever rate of RGDP growth that is technically possible without deflation. It is also technically possible to implement such a system and know that it is working, because, unlike NGDP, the CRB Index is available in real time and is never revised.

  5. Gravatar of Spencer Hall Spencer Hall
    14. July 2021 at 17:37

    Outstanding. First to actually define the term. But if Powell was in Jacob Viner’s class (a leading figure of the Chicago faculty in the 1930’s), he would say:

    “You don’t belong in his class”.

    Now that’s he’s overshot, will he not undershoot? Oh, but you can’t have it both ways?

    FAIT is what Japan engaged in prior to the bursting of the bubbles.

    Japan’s historical CPI,%20%20102.0%20%2024%20more%20rows%20

  6. Gravatar of Spencer Hall Spencer Hall
    14. July 2021 at 17:39

    To quote economist John Gurley, “Money is a veil, but when the veil flutters, real-output sputters.”

  7. Gravatar of ankh ankh
    14. July 2021 at 18:35

    Three months ago, Sumner told us three trillion in stimulus wouldn’t “overheat the economy”.

    Last November, he told us that “election fraud doesn’t exist”. Two audits in Arizona and Georgia now prove otherwise.

    I wonder if he ever gets tired of being wrong!

    Like most central planners, Sumner’s arrogance and hubris exceeds his grasp. He’s a relic from the past who would feel right at home in Soviet Russia or Mao’s China.

    If you retire, we promise to place a nice photo of you with the caption: “another tyrannical central planner who destroyed his country”, at a few Museums.

    I’m sure posterity will enjoy it.

    In the meantime, please tell your cohort of dummies to take their hands off the economic wheel!

    Entrepreneurs don’t need you!

    Thank you so much.

  8. Gravatar of Ken P Ken P
    14. July 2021 at 20:53

    To me the tweet reads like Matt is looking for hypotheses not definitions.

    1)Cathy Wood says that the supply shock caused over ordering that will push things into deflation as things return to normal and orders are canceled. (temporarily had too few goods and elevated demand)
    2)On the other side, you have the standard money supply was expanded (too much money) with the money being shoved into the financial system so that you expect the Cantilon effect: Assets (stocks, homes other purchases by central bank and their immediate customers) go up first.

    In reality, prices are so independently influenced by everything that measurements are almost meaningless. A lot of people sell bits which are almost free to produce. If you sell something that is costly to produce but can be sustituted by technology, your product will have deflated prices. If your product is not easily substituted and scarce, your product will have inflated prices.

  9. Gravatar of Sean Sean
    15. July 2021 at 06:12

    Always thought the Fed misinterpreting an oil price shock in 2008 was as much of a cause of the Great Recession as the housing bubble. And yes I slightly disagree with you on their being a housing bubble then – we definitely built 1-2 million more homes earlier than needed but it was only a small dislocation.

  10. Gravatar of Sean Sean
    15. July 2021 at 06:19

    Fed sucks at talking about transitory inflation. I think it can be trivial.

    Transitory – inflation due to supply side shock. Shock related to reopening supply chains and productivity losses (that are hopefully regained). Related to worker shortages from covid fears or extended unemployment benefits.

    Non-Transitory – inflation related to excess aggregate demand growth

  11. Gravatar of henry henry
    15. July 2021 at 06:38

    Ah yes, Vox and Mathew Yglesias.

    The left wing VOX propaganda machine where apparently Sumner gets his “news”.

    The foot dragging, knuckle dragging Neanderthal Sumner, is still propagating his old-aged platitudes:

    Tariff Bad.
    Conservative Bad.
    Devaluing Currency Good.
    Drugs good.
    CCP Good.
    Liberty bad.
    Outsourcing jobs good.
    totalitarianism good.
    individual choice bad.

    You can here his growlings and mutterings, all the way from that tiny corrupt state of Massachusetts.

    If voting with your feet is any indicator of bad policy, then MA, NY and CA are the worst places to live. Failed democrats, or shall we call them plutocrats, cronycats, and corruptocats, are losing residence enmass.

    Welcome to Texas! But please don’t vote for the same losers that turned your previous residence into a totalitarian state.

  12. Gravatar of d d
    15. July 2021 at 06:58

    as a human, it seems that there can never be wage growth at all. the definitions never allow for it

  13. Gravatar of d d
    15. July 2021 at 07:02

    not sure i would call Texas a free state, it is for for some, just not all

  14. Gravatar of ssumner ssumner
    15. July 2021 at 08:46

    Louis, You may well be right, but I view the CRB as too volatile to be a reliable guide to monetary policy. A useful input? Perhaps. I still think TIPS spreads are better.

    Sean, Agree about oil, but if housing was overbuilt, then why were house prices so high in 2006?

  15. Gravatar of Spencer Hall Spencer Hall
    15. July 2021 at 08:55

    re: “then why were house prices so high in 2006?”

    At the height of the stock market bubble, Federal Reserve Chairman Alan Greenspan initiated a “tight” monetary policy (for 31 out of 34 months).

    Note: A “tight” money policy is defined as one where the rate-of-change in monetary flows (our means-of-payment money times its transactions’ rate of turnover) is no greater than 2% above the rate-of-change in the real output of goods and services.

    Greenspan then wildly reversed his “tight” money policy (at that point Greenspan was well behind the employment curve), and reverted to a very “easy” monetary policy — for 20 consecutive months (i.e., despite 14 raises in the FFR (June 30, 2004 until January 31, 2006), – every single rate hike was “behind the inflationary curve”, behind RoC’s in long-term money flows). I.e., Greenspan NEVER tightened monetary policy.

  16. Gravatar of Spencer Hall Spencer Hall
    15. July 2021 at 09:36

    “CHAIRMAN GREENSPAN. I must say that I have not changed my view that inflation is fundamentally a monetary phenomenon. But I am becoming far more skeptical that we can define a proxy that actually captures what money is, either in terms of transaction balances or those elements in the economic decision making process which represent money. We are struggling here.

    I think we have to be careful not to assume by definition that M1, M2, or M3 or anything is money. They are all proxies for the underlying conceptual variable that we all employ in our generic evaluation of the impact of money on the economy. Now, what this suggests to me is that money is hiding itself very well.”

    You wonder how these guys became Chairman. Nothing’s changed in > 100 years.

  17. Gravatar of Justin Justin
    15. July 2021 at 11:30


    What do you think the risks are of a price/wage spiral?

    Annualized CPI so far in 2021 has been 7.4%. Job openings are at record highs, and plenty of establishments I frequent don’t have workers. A place I go to brunch had to close because it couldn’t find help.

    I don’t live on the coasts, and pretty basic jobs (e.g. entry-level Chik Fil A) are offering $14.50/hr. I don’t think I’ve seen any wage offered lower than $11 or $12. You could raise the federal minimum wage to $12/hr and it would have no effect on this labor market. I don’t think that wage cuts will be able to follow this spike in wages.

    Suppose that CPI for Dec21 is 5% higher than Dec22 (2021H2 annualized inflation of 2.6%). Don’t you think a lot of corporate workers will want 5%+ in their raises, and be willing to shop around for a new job if they don’t get it? Money Illusion is a thing, but if people see that the cost of a used car is up 30% and a new house is up 15%, how many are going to be happy with a typical 2% annual raise?

    Clearly contractionary policy could offset this, but it seems politically unlikely. I’m hopeful that the expiration of unemployment insurance helps reduce labor and other shortages, helping to bring prices back down, but it doesn’t seem like we can go too many more months with 0.7% or 0.9% core/headline inflation without it starting to stick.

    Curious about your view.

  18. Gravatar of Sean Sean
    15. July 2021 at 12:40

    Markets have a bit of momentum to them. Prices were going up. Eventually human psychology took off and figured home prices just went up. So dumb speculators built homes on spec without people to live in them. We probably only overbuilt by 1-2 million homes then.

    Especially with an illiquid asset like housing the market can be a little silly for a few years. But not something that should have triggered what it did.

  19. Gravatar of ssumner ssumner
    15. July 2021 at 16:42

    Justin, I think the probability of a sustained wage price spiral is pretty low. The real question is whether the inflation abates on its own, or requires a recession in 2023.

    I’d say its 70-30 that it abates on its own. That’s a higher risk of recession than usual, but still not the odds on favorite.

  20. Gravatar of Jonas Jonas
    16. July 2021 at 06:30

    “Welcome to Texas! But please don’t vote for the same losers that turned your previous residence into a totalitarian state.”

    The Camp Auschwitz shirts-wearing crowd is really getting desperate.

  21. Gravatar of Spencer Hall Spencer Hall
    16. July 2021 at 07:09

    re: “I’d say its 70-30 that it abates on its own.”

    We’ve never had a FED chairman that understood money and central banking. Volcker, by himself, created two back-to-back recessions. My professor was flown on a private jet to Washington D.C. to meet with Volcker back then. Volcker’s iconoclasm is a myth.

    Contrary to Bagehot’s dictum”, Paul Volcker managed the discount window at a discount during high inflation. And Paul Volcker’s operating procedure Volcker targeted non-borrowed reserves (@$18.174b 4/1/1980) when at times there were over (@$44.88b) in total reserves. And total legal reserves increased at a 17% annual rate of change in 1980.

    Paul Volcker pontificated: “Watch the Money Supply”. But the money stock rose by 20% in 1980.

    Today, Powell has disavowed monetarism. Powell:

    “Inflation is not a problem for this time as near as I can figure. Right now, M2 [money supply] does not really have important implications. It is something we have to unlearn.”

    “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time” Powell refers to M2.

    Secular stagnation is still in play. Banks don’t loan out deposits.

  22. Gravatar of Spencer Hall Spencer Hall
    16. July 2021 at 11:25

    Joe Carson: “Using the measurement practices of owners’ housing costs of the 1970s would push the current consumer price inflation readings close to the double-digit gains last seen in the 1970s. That means the US is experiencing a more significant “inflation bubble” than is being reported or recognized by everyone.”

  23. Gravatar of Ray Lopez Ray Lopez
    16. July 2021 at 11:40

    Given that: 1) money is largely neutral, short term and long term, 2) Paul Volcker during the 1980s raised interest rates and inflation ROSE and also lowered interest rates and inflation FELL (i.e., the Fed follows the marketplace, does not lead it), and 3) inflation is governed by expectations (cobweb model), we can see the error of our host’s ways, and the answer to the question “what is transient inflation” being: “it depends on what people think”. Time will tell. In an era of fiat money however, as opposed to a universally agreed value like a gold back currency, there’s no limit to inflation, as a paper by N. Gregory Mankiw once said (i.e., some gold in a central bank will prevent hyperinflation).

  24. Gravatar of Lars Christensen Lars Christensen
    17. July 2021 at 04:06


    The market monetarist perspective would not be whether inflation is temporary, but rather whether inflation and/or nominal income with return to the target path level.

  25. Gravatar of Spencer Hall Spencer Hall
    17. July 2021 at 06:04

    Lopez, re: “raised interest rates and inflation ROSE”

    What do rates have to do with inflation?

  26. Gravatar of ssumner ssumner
    17. July 2021 at 10:14

    Lars, Not just whether we return to the path, but how quickly, and whether we do so without a recession.

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