But so far, rising inflation has not been incorporated into any of the “sticky” prices in the economy, according to the measure constructed by the Atlanta Federal Reserve. True, the financial market’s current 30-year breakeven inflation rate, at 2.35%, is more than half a percentage point above where it settled in the second half of the 2010s. But today’s rate is similar to that in the first half of the decade, and slightly below the level that would be consistent with the US Federal Reserve’s inflation target of 2% per year.
The current uptick in US inflation is highly likely to be simply rubber on the road, resulting from the post-pandemic recovery. There is no sign that inflation expectations have become de-anchored. The labor market is still weak enough that workers are unable to demand substantial increases in real wages. Financial markets are blasé about the possibility of rising inflation. And a substantial fiscal contraction is already in train.
Given these facts, why would anybody argue that the “original sin” was the “oversized American Rescue Plan,” and that tightening monetary policy starting right now is the proper way to expiate it? I, for one, simply cannot follow their logic.
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.