Inflation has been on the minds of consumers, policy makers, and economists for much of 2021. Consumer prices in the United States are rising at the fastest pace in three decades, and Treasury secretary Janet Yellen and Federal Reserve chair Jerome Powell have both acknowledged it’s time to stop calling the phenomenon “transitory.” Given the magnitude and persistence of price pressures, Chicago Booth’s Initiative on Global Markets invited its US panel of economic experts to express their views on the risks of prolonged higher inflation as a result of the current stance of fiscal and monetary policy, as well as the likely impact of an easing of supply bottlenecks.
Question A: The supply bottlenecks that are currently contributing to rising prices can be reasonably expected to abate without causing inflation over the longer term to be above the Fed’s target.
On the first statement, weighted by each expert’s confidence in their response, 55 percent agreed, 34 percent were uncertain, and 11 percent disagreed. The short comments that the panelists are able to include when they participate in the survey provide a variety of perspectives on the potential effects of current supply bottlenecks on inflation over the longer term.
Among those who agreed that inflationary pressures can be expected to abate, Austan Goolsbee of Chicago Booth remarked, “The steady state for a manufactured good is not shortage.” Carl Shapiro of Berkeley said, “Temporary supply constraints cannot cause long-term inflation. People should indicate a time frame when they say ‘long term.’” Darrell Duffie of Stanford commented, “I agree because (a) the supply-chain disruptions are not permanent and (b) the Fed will eventually act.” Robert Hall at Stanford added, “That is the Fed’s job.”
Peter J. Klenow of Stanford pointed to some further reading with a consensus view on inflation prospects: “In the latest Survey of Professional Forecasters, PCE inflation is expected to average 2.3 percent from 2021-2030.” David Autor of MIT also agreed but with a caveat: “The supply bottlenecks will likely abate, but I doubt that this alone will resolve the inflation threat.” And William Nordhaus of Yale, who disagreed, explained why: “Depends upon the wage response and expectations, as well as Fed timing.”
Several participants who said that they were uncertain made reference to inflation expectations. Larry Samuelson of Yale noted, “The supply bottlenecks will abate, but expectations or other adaptations to inflation may then cause inflation to persist.” Richard Schmalensee of Yale concurred: “Bottlenecks can reasonably be expected to abate in the near term, but longer-term impacts on expectations are uncertain.” And Anil K Kashyap of Chicago Booth stated, “The inflation is here, future expectations could shift, indexing could reemerge (see John Deere union contract), no way to be certain.”
Similarly, Robert Shimer of Chicago warned, “Supply bottlenecks will abate unless new barriers are created. But current adverse supply shocks may still lead to persistent inflation.” And Aaron Edlin of Berkeley concluded, “Inflation might be temporary if its causes are temporary. But inflation does tend to cause inflation.”
Question B: The current combination of US fiscal and monetary policy poses a serious risk of prolonged higher inflation.
The second statement concerns the potential inflationary effects of the current stance of fiscal and monetary policy. Weighted by each expert’s confidence in their response, 5 percent strongly agreed with the statement, 48 percent agreed, 35 percent were uncertain, 8 percent disagreed, and 5 percent strongly disagreed (the totals don’t always sum to 100 because of rounding).
IGM asked the same question in June: at that time, 33 percent agreed with the statement, 36 percent were uncertain, 26 percent disagreed, and 4 percent strongly disagreed. So while the share that is uncertain has remained at just over a third, the share that agreed has gone from a third to over a half, and the share that disagreed has gone from just under a third to less than an eighth.
Several panelists who agreed with the statement comment on the role of the Fed. Markus Brunnermeier of Princeton said, “The outcome will depend on the Fed reaction function and future fiscal policy.” And David Autor noted, “The Fed erred correctly on the side of labor market recovery over inflation risk. Inflation risk is now inflation reality. Recalculating...”
Ray Fair of Yale pointed to his own analysis of the issue: “I have a recent paper, ‘What Do Price Equations Say About Future Inflation?’, which has higher inflation predictions than the Fed expects.” Peter J. Klenow added, “This is why markets expect the Fed to eventually tighten,” providing a link to the Atlanta Fed’s market probability tracker. And Eric Maskin of Harvard referred to fiscal policy: “There are indeed inflationary risks, but the infrastructure act and the Build Back Better bill may help ease long-term inflation.”
Others who agreed with the statement were concerned about our collective lack of experience of inflation in recent times. Robert Shimer noted, “We have no recent experience in an environment with unanchored inflation expectations.” Michael Greenstone of Chicago commented, “Source of inflation is uncertain but current policy mix seems to assume too low probability that monetary/fiscal policy can make it worse.”
Among experts who said that they were uncertain, Jose Scheinkman of Columbia said, “Would agree, if current fed funds rate and rate of asset purchases are maintained even if inflation fails to abate, but not otherwise.” Richard Schmalensee observed, “I agree that current policy is too expansionary, but the Fed is shifting, and the statement seems way too strong.”
Kenneth Judd of Stanford, who was also uncertain, noted, “Inflation dropped as deficits rose in the 1980s. Increases in money did not ignite inflation after 2008.” In a related comment, Larry Samuelson, who agreed with the statement, added, “Our old models suggest that massive deficits eventually beget inflation. But, this has not happened yet, so perhaps we need new models.”
Finally, William Nordhaus, who strongly disagreed with the statement, explained, “The Fed has the tools and the will, but it may take time because of inertia coming out of years of low inflation.”
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