Jared Bernstein and Ernie Tedeschi

“ Such a transitory rise in inflation would be consistent with some prior episodes in American history coming out of a pandemic or when the labor market has quickly shifted, such as demobilization from wars. We will, however, carefully monitor both actual price changes and inflation expectations for any signs of unexpected price pressures that might arise as America leaves the pandemic behind and enters the next economic expansion. ”

“ The COVID-19 pandemic has caused an unconventional recession, and we do not expect the recovery will be typical either. While the paramount policy goals are to control the virus, get to full employment, and make the necessary investments for a more resilient and inclusive recovery, economic uncertainties and risks demand careful attention going forward. One risk the Administration is monitoring closely is inflation.
Inflation—or the rate of change in prices over time—is not a simple phenomenon to measure or interpret. ”

“ As more people get vaccinated throughout the year, however, demand for these and other high-touch services could surge and temporarily outstrip supply. This surge in demand may in part be fueled by savings many households accumulated during the pandemic, as well as relief payments from the fiscal responses last year and this year. For example, Americans may have a high demand to eat out in full-service restaurants again later this year, but may find that there are fewer dining options than were open pre-pandemic. ”

“ Over the next few months, as the base effects’ months drift further into the past, this distortionary characteristic of the price data should fade.
SUPPLY CHAIN DISRUPTIONS & MISALIGNMENTS A second potential source of inflation stems from increases in the cost of production. If the cost of the materials needed to produce a good or service rises (think of the lumber needed to build a house or the electricity needed to power a factory) , a business may pass on these costs to consumers in the form of higher prices; economists call this cost push inflation. ”

“ And while there are natural limits to how many services we can consume quickly—it’s generally only possible for a family to take one vacation at time, for example—Americans may still try to consume these services more frequently, or may upgrade to higher-quality versions. Economists call inflation resulting from such surges in spending demand pull inflation. ”

“ The issue with base effects is not that they make inflation measures wrong; the 2.3 percent year-over-year inflation calculation in our illustrative example would still be correct. Rather, the base effects distort our understanding of how underlying, near-term trend inflation is behaving right now, suggesting, for example, higher rates of inflation than most analysts expect to persist. ”

“ The United States experienced short bursts of inflation in some prior periods of pandemics or large-scale reallocations of economic resources, such as in 1918—driven by the Spanish Flu and demobilization from World War I—as well as the demobilization from World War II after 1945 and the resurgence in defense spending due to the Korean War. ”

“ Transportation and warehousing costs—ground, air, and ocean—have also risen as cargo logistics have become more difficult. The recent backlog in the Suez Canal will add to these issues in the near term. And surges in demand for certain products, like those that use computer chips, have caused unanticipated supply constraints in industries such as semiconductors. ”

“ Again, we expect this to primarily be a short-term issue; as businesses that shuttered or substantially reduced their services reopen, supply will increase to meet this pent-up demand. Encouragingly on this point, new business formation has picked up in recent months. ”