How Should We Think About 'Transient Inflation'?

Jul. 15, 2021 11:30 AM ETTBT, TLT, TMV, IEF, SHY, TBF, EDV, TMF, PST, TTT, ZROZ, VGLT, TLH, IEI, BIL, TYO, UBT, UST, PLW, VGSH, SHV, VGIT, GOVT, SCHO, TBX, SCHR, GSY, TYD, DTYL, EGF, VUSTX, DTUS, DTUL, DFVL, TAPR, DFVS, FIBR, GBIL, UDN, USDU, UUP, RINF5 Comments6 Likes
Scott Sumner profile picture
Scott Sumner
1.08K Followers

Summary

  • One definition of transient inflation is higher than normal inflation that will soon return to normal (say 2%.).
  • A transient inflation can be brought back to 2% relatively quickly without triggering much higher unemployment.
  • 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.

Inflation written newspaper
CasPhotography/iStock via Getty Images

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:

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Scott Sumner profile picture
1.08K Followers
Bio My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.
Follow
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.