Treasury Secretary Janet Yellen waded into the “transitory” versus “persistent” inflation debate on Tuesday, insisting it’s reasonable to view the current price spike as temporary even if it doesn’t abate within the next few months.
Yellen’s remarks come as debate swirls around the durability of the current inflationary spell. Federal Reserve officials have repeatedly characterized it as “transitory” though they have increasingly expressed concern about the risk of a de-anchoring of inflationary expectations. That’s where confidence in the “transitory” narrative falls and people start to believe and behave as if inflation will be far stickier than previously believed, impacting wage and price-setting behavior and potentially even sparking the kind of upward wage-price spiral that bedeviled the economy in the 1970s.
While it’s not clear how Fed officials define “transitory,” Federal Reserve Vice Chair Richard Clarida told Bloomberg in an interview earlier this year that if “inflation at the end of the year has not declined from where it is in the middle of the year that will be some good evidence,” that the Fed’s current outlook is wrong.
But a run of hot price data, including elevated numbers for several months running in the Fed’s preferred inflation gauge, the core PCE inflation index, have already led to a reframing of Clarida’s “transitory” framework. Federal Reserve Chairman Jerome Powell said last week that he saw bottlenecks and supply problems “not getting better—in fact at the margins apparently getting a little bit worse.”
“We see that continuing into next year probably, and holding up inflation longer than we had thought,” Powell said at a panel discussion hosted by the European Central Bank on Sept. 29.
“The whole notion of a transitory development is it doesn’t change behavior,” he said. “It doesn’t change wage-setting behavior. It doesn’t change price-setting behavior.”
El-Erian noted, however, that he and many of his economist colleagues are seeing a shift in those behaviors.
“These behaviors are evolving, they are changing. Companies feel more confident to increase prices, because prices are going up everywhere,” he said.
“So the end of the year was really something that [Richard Clarida] put out there, but the real test is do we see inflationary expectations, price-setting behavior, and wage-setting behavior, changing.”
Besides evidence of firms passing on higher prices to consumers and boosting wages to attract and retain workers at a time when the U.S. economy has a record-high number of job openings, there is also evidence of a rise in inflationary expectations, at least in a near-term horizon.
Williams noted, however, that there are upside risks and a “great deal of uncertainty” around the inflationary outlook.