How Long Will Higher Inflation Last?

For the first time in more than a generation, we are grappling with high, broad-based, and persistent inflation.

The pandemic and events like Russia's invasion of Ukraine unleashed shocks that affected supply chains and labor markets, pushing prices and wages up. In response to the pandemic, $6 trillion of fiscal stimulus was enacted, fueling demand and limiting labor supply. And some have argued the Fed's pandemic response was too expansionary for too long — that we were caught off guard after the prior decade of stubbornly low inflation.

Movements in any of these factors could have quieted inflation somewhat. But I'm not convinced any one of them is the whole story.

I've been spending a lot of my time on the ground with business and community leaders who help me understand how businesses and individuals experience the economy. Based on those experiences, what I'm seeing is the accumulation of many inflationary pressures at once. In football terms, we flooded the zone.

Over the past 40 years, inflation stayed so low and so stable that price and wage increases became an all-but-abandoned lever. Price-setters lost confidence that they could pass costs on to customers; they focused on reducing their own costs instead. Firms employed sophisticated purchasing professionals to fight suppliers hard on cost increases. Workers grew to expect annual increases in a low and narrow range. In that era of price and wage stability, consumers, quite rationally, were inattentive to inflation.

Now we have seen intense inflation pressures accumulate and persist. Massive industry-wide cost pressures pushed suppliers to take the risk of passing cost increases on to customers. Supply shortages gave them confidence they could do so. Purchasers, focused on resiliency rather than efficiency, stopped objecting as much. Investors rewarded companies that passed price increases on and penalized those more reticent. Consumers, funded by stimulus, mostly accepted price increases. Workers gained confidence in this very tight labor market and negotiated for flexibility or wage increases. Employers desperately adjusted to do what it took to retain and recruit.