“With excess saving they can afford more of everything,” Jason Furman, a Harvard economist and former Obama administration official, wrote this week.
Although companies are increasing the supply of many products to satisfy rising demand, they may not always be able to keep up. One unknown, as Neil points out, is how many people have decided that they prefer the slower pace of pandemic life and choose not to return to full-time work. A lower labor supply could lead to more competition for workers and to wage increases that would translate into price increases.
If inflation remains elevated for months, it could feed on itself. Companies would increase prices, to cover the higher cost of raw materials. Workers would ask for wage increases, to maintain their buying power. The Federal Reserve might then need to raise interest rates to prevent an inflationary spiral, and rapid rate increase has caused recessions in the past.
Furman has called the chances of persistent inflation “under appreciated.”
The low-inflation scenario
But you can also tell a plausible story about why inflation won’t last. This is the scenario that most officials at the Fed and in the Biden administration consider to be more likely.
One reason to be skeptical about dire inflation warnings is that economists have repeatedly overestimated the risks of inflation in the 21st century. And several features of the modern American economy seem to restrain inflation. Global competition is one, Powell has argued. Another is American workers’ relative lack of bargaining power, which means that companies can often wait out temporary price spikes without increasing wages.
Fed officials believe that these larger forces will prove more powerful than the short-term disruptions from the economy’s post-pandemic reopening. (Neil has written a helpful explainer on this subject.)
Already, there is some evidence to support the Fed’s sanguine view. Some companies have responded to higher prices, and to the opportunity to make higher profits, by increasing output. To take one example, lumber prices, after rising sharply, are now falling. “As the economy is opening back up again, prices are now moving back toward normal levels in leisure, hospitality, airfare and the like,” Janet Yellen, the Treasury secretary, said in a Senate hearing yesterday.