Transitory inflation retires but does not recede

His reappointment as conductor of the world’s monetary orchestra safely in the bag, US Federal Reserve chairman Jay Powell let us know that the current bout of “transitory” inflation was a little more than that.

“It is probably a good time to retire that word”, he told the world.

As euphemisms go, it may not acquire the notoriety of the Nixon White House’s description of a previous statement as “inoperative”.

But Germans contemplating a 5.2% inflation rate (a thirty year high) during a winter of natural gas shortages, lockdown blues and vaccination mandate disorder might prefer a stronger term.

So this is not being chalked up as an error in policymaker expectations.  Refugees from transitory-land might retort that at least they haven’t been caught out predicting hyperinflation for the last umpteen years.   True enough (even if their fears of deflation were also, with hindsight, a touch fanciful.)

But thankfully, by acknowledging that current inflation is more sustained and meaningful – and requires a response – the monetary priesthood encourages us to hope that they will act to ensure that the inflation will indeed be – transitory.  

Just more transitory than first hoped.

And the good news is that the only thing worse than inflation is for it to be artificially suppressed.

Relative price changes are signals.  They seem to be trying to tell us a lot now, whether in the form of tight labour markets, whipsawing energy production, Christmas turkey shortage predictions or container ships queuing up outside a port near you.

They make the value of different bits of production and consumption clearer, and help us (and business and government folk) make better decisions.  They are also very useful for helping to understand just who – to paraphrase Lenin – is financially carrying whom.

Moreover, the correct official response to inflation is pretty clear: don’t feed the beast.

This means watching the productive and powerful put their prices up, and not forbidding change, printing money or putting up taxes (too much) to compensate the unproductive and weak.  (Let’s put aside the problem of the unproductive and powerful for now).

While some see this as doctrinaire callousness, others might see it as a question of where best to provide government support when capacity is limited.

Because capacity is getting more limited.  As the Covid tide recedes, the burden acquired in responding to the disruption looms ever heavier. 

Britain’s National Audit Office has said that the government’s measures to prevent fraud in its £47 billion non-credit checked small business loan scheme were “inadequate”.  That might seem a restrained judgement if estimates that £5 billion has been stolen prove correct.  Perhaps we’ll find out if a scheme linking support to past tax receipts might have proved fairer, more efficient and more sustainable?

The principal legacy of this burst of transitory-but-prolonged inflation might be in the clarity it injects into the debate on who contributes and who gets.

In democratic politics, voters know it’s bad enough when caught with their hand in the public cookie jar. But it’s made even worse having to endure the humiliation of a public lecture.

What does not destroy you, may make you stronger, but hardly more disposed to laud the Thatcherite prig who made you what you are today.

If there were a common thread connecting the Clark and Key (Clar-key?) administrations, it was in their understanding of the public’s appetite for tolerance in fudging conflicts and buying off noisy threats.

As inflation bites, that tolerance might prove – transitory.

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