Seven years ago, former Federal Reserve Chairman Ben Bernanke spoke at Schwab Impact’s annual conference in Denver. Asked about the vituperative criticism that his quantitative easing policy following the financial crisis would spark runaway inflation, even the courtly, soft-spoken South Carolinian could barely conceal his contempt for the critics. Back in 2014, it was clear the biggest concern was deflation.

Seven years later this past October, Bernanke returned to the Schwab event in a very different world. That month the Consumer Price Index hit 6.2%, the fifth month in a row the inflation gauge consumers see topped 5%. It was the highest level since 1990, when the lead-up to the first Persian Gulf War caused a spike in the price of oil. One of a few other monthly inflation numbers that was close came in July 2008, when the economy was entering the worst recession in 80 years.

Circumstances today are very different from 1990 and 2008. No one is talking about a recession, but the massive run-up in debt and the jump in prices look eerily similar.

So do certain conditions in the labor market. Over the last six months, the unemployment rate has dropped 1.5% to 4.6%. “If this measure of unemployment is accurate, the expansion is getting old,” Jim Paulsen, chief market strategist at The Leuthold Group, says.

But when the economy emerged from recessions in 1991 and 2009, the balance of power between employers and workers in the labor market was tilted in favor of employers. Today, many businesses like restaurants and trucking companies are turning away business because they can’t find enough workers.

Labor shortages aren’t simply driving up costs; they are constricting growth. A company can’t “maximize their business model if they can’t find people,” says Michael Cuggino, president and chief investment officer at Permanent Portfolio.

Asked about the current bout of inflation, Bernanke told advisors that a lot of the price problems are associated with reopening the economy after a pandemic-driven lockdown. However, Bernanke said if inflation were running above a 2.8% or 3.0% rate a year from now, the Fed’s credibility would be at stake. It would be apparent the central bank misread the ramifications of its monetary policy in 2020 and it could be forced to act aggressively.

Some observers think Bernanke was being generous to his former colleagues. “The Fed already has a credibility challenge,” Erik Weisman, chief economist and portfolio manager at MFS Investments, says. “They are asking for a time-out.”

Fed chairman Jerome Powell has indicated the central bank doesn’t want to make “a determination until the second quarter” of 2022, Weisman continues. In the face of mounting evidence they misread the economy, the Fed’s position is “to stick to their strategy and hope.”

What’s striking is how expectations among professional investors and the public alike have changed to the point that some experts think that a 3.0% inflation rate in 2022’s fourth quarter would confirm that it’s not a long-term threat. In contrast to past inflation surges that were confined to a few sectors like energy, the current round has pervaded almost every sector of the economy in a fashion reminiscent of the 1970s.

Still, some like J.P. Morgan Asset Management’s chief market strategist David Kelly don’t think the Fed is so far off. He told clients recently that price hikes in energy, food and automobiles are likely to level off as bottlenecks subside in the next year and said the CPI should be running at about 2.3%.

But if the 2.8% to 3.0% inflation benchmark that Bernanke tossed out at the Schwab event is the new normal, it marks a serious departure from the past decade. “That would be an approximate 50% increase from the Fed’s stated long-term goal of 2%,” Cuggino says. “Given recent and increasing inflationary pressures, there may be an upward bias to go well beyond 3% on a longer-term basis.”

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