Meanwhile, some deflationary forces may soon reverse. Economist Charles Goodhart expects an aging population, especially in China, will spell the end to cheap labor that produced low-priced goods. Efficiency could suffer long term from the supply-chain disruptions if firms maintain bigger inventories as a cushion against future shortages. The White House is pushing more domestic production and encouraging less trade, which will make goods more expensive. Democrats and Republicans both favor these policies; odds are they will continue no matter who is in office.
On the bright side, higher inflation needn’t be bad for the economy. Uncertainty creates the biggest problems. If people don’t know whether inflation will be 2% or 5% year-to-year, this can pose many costs. Firms don’t know how much they can increase prices without it affecting the demand for their goods and services, and workers don’t know how much of a raise they need to maintain their purchasing power. Saving, spending and investment decisions all become much harder. All this uncertainty can cause people to pull back on economic activity, which harms the economy.
Stability can become more important than the actual level of inflation. If it’s higher but remains in a tight range, it won't cause too much damage to the economy. When the average inflation rate was 4% or 5% for many years, the economy still grew. Before the latest events, several economists even argued the Fed should target a 4% inflation rate because it would provide more room to conduct monetary policy.
Ultimately, the Fed may not have much control over where inflation settles. It’s largely driven by the macroeconomic forces in our economy that the Fed has limited influence over. But if the Fed pursues responsible, consistent and transparent policies it can promote price stability. That means we could be living in a stable, 4% inflation world, and that may be the best we can hope for.
Allison Schrager is a Bloomberg Opinion columnist. She is a senior fellow at the Manhattan Institute and author of An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.