Is High Inflation the New Normal?

During the second half of 2021, economists debated whether inflation in the U.S. would be “permanent” or “transitory.” Inflation hawks argued that massive fiscal and monetary stimulus was the obvious cause of price hikes. Inflation doves replied that rising prices were primarily due to pandemic-related supply chain disruptions. In early December, the debate suddenly shifted: Federal Reserve Chairman Jerome Powell told legislators, “it’s probably time to retire that word”—transitory—and the hawks took a victory lap.

It is easy to see why Powell was concerned. With inflation running at 7 percent, we are experiencing the strongest price pressures in nearly 40 years. But inflation is tough to fully explain and even harder to predict.

Partisans in the inflation battle frequently fail to acknowledge that their stories are not mutually exclusive. If public policy boosts demand while production bottlenecks hamper supply, there is no question about what happens to prices—up they go. Digging further into the debate provides additional reasons to eschew confident assertions.

Orthodox economic theory says fiscal and monetary stimulus can increase total spending, or what economists call aggregate demand. We’ve certainly had lots of both. The American Rescue Plan Act, signed into law by President Joe Biden on March 11, 2021, had a top-line figure of $1.9 trillion. Expansionary fiscal policy, meaning increased government spending to boost output and employment, requires deficit spending, because financing outlays with taxes blunts the effects on aggregat