The US is heading into a new era of elevated inflation that’s likely to persist long after the red-hot prices of the past year or so come off the boil.
Deep-seated trends in trade and demographics helped keep inflation in a comfort zone for decades, but both are now pushing in the opposite direction. Globalization was fraying even before pandemic and war made things worse. Growth in the world’s labor force has slowed.
Then there’s the looming cost of transition to net-zero carbon emissions—likely to push all kinds of prices higher in the years ahead -– and the prospect of a sustained run-up in rents due to America’s dearth of affordable housing.
Back to Stay? | Subdued for decades, US consumer prices have soared in the pandemic—and some fear that higher inflation won't go away anytime soon
It all adds up to a changed landscape. Yes, inflation probably will retreat from near four-decade highs, as supply-chain snafus unwind and economic growth slows in response to interest-rate increases by the Federal Reserve. But it may prove stubbornly higher than the 1.5%-to-2% range that American consumers, businesses and investors grew accustomed to before the pandemic spike.
“The long era of low inflation, suppressed volatility, and easy financial conditions is ending,” said Mark Carney, who ran the central banks of Canada and the U.K. The economics of the coming period will be “more challenging,” he said.
In this new environment, borrowers from homebuyers to the US Treasury will have to pay more. There’ll be fewer jobs for workers, as the Fed puts a squeeze on labor markets—and more risks for investors, who’ll have to factor in a central bank more preoccupied with cooling inflation than promoting economic growth. Politicians may see more pushback against their spending plans, and they’ll face voters increasingly unhappy about rising costs of living.
‘Old Testament Mode’
Fed officials have hinted that they see lasting shifts ahead.
Chair Jerome Powell said last month that globalization has slowed down—and that if goes into reverse, “it would be a different world.” Richmond Fed chief Tom Barkin cited the potential for “more medium-term inflationary pressure” that the central bank will have to take into account as it strives to hit its 2% target.
Where inflation ultimately settles will largely depend on what the Fed—and the American public—are willing to tolerate.
The late Paul Volcker showed in the 1970s that the Fed has the tools to rein in inflation, but at a high cost. To break the back of double-digit price gains, he drove the economy into a deep recession and pushed unemployment above 10%.
“If you ask me where inflation is going to be in the next 10 years, I’m going to tell you it depends centrally on what the Fed’s preferences are,” said JPMorgan Chase & Co. chief economist Bruce Kasman. “And the Fed’s preferences have to do with societal preferences.”
Kasman reckons that Powell & Co. would be comfortable with inflation landing in a “sweet spot” around 2.5%.