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Skyrocketing Inflation Isn't Enough to Scare Team Transitory Into Changing Course

Over the span of the pandemic, certain numbers have loomed large. Early on, it was the daily coronavirus case count. Then weekly unemployment claims became a data point to watch.  
Lately, however, monthly inflation measures are drawing the most headlines, and perhaps unsurprisingly. The consumer price index (CPI) hit a 30-year high this week and the debate over what this means for the economic recovery is heating up right along with it. 
The Labor Department's CPI measure, which tracks what consumers pay for goods and services, jumped 6.2 percent in October from a year ago. That's the biggest year-over-year gain since 1990 and the sixth monthly measure in a row to come in at 5 percent or above. 
Even more importantly for consumers, price increases have become more broad-based. Everything from rent to gasoline to furniture to medicine are all feeling the brunt of high inflation. In past months, price gains were predominately in categories hard-hit by the pandemic. 
Food was up 5.3 percent year-over-year, for example, while apparel was up 4.3 percent, and energy was up a whopping 30 percent due to a worldwide crisis 
For comparison, inflation over the last three decades has averaged around 2 percent. 
With a rate roughly triple that, many economists and politicians are concerned that the U.S. is headed for the kind of inflationary spiral that plagued the economy through the 1970s. 
Others — including Federal Reserve Chair Jerome Powell — have been steadfast in pushing the narrative that recent price increases stem from COVID-related supply bottlenecks and will prove "transitory" in the long-run as production ramps back up and ports work through their backlogs. 
"There is nothing I saw in [the October] data that makes me feel different," Claudia Sahm, senior fellow at the Jain Family Institute and a former Federal Reserve and White House economist, told Cheddar on Thursday. "Inflation will come down."
At stake here is whether fiscal and monetary stimulus should continue, or if it's time for both the Federal Reserve and Capitol Hill to pump the brakes on putting more money into the economy. 
These have been the terms of the debate for about a year now, but as one inflation measure after another comes in higher than expected, so-called "Team Transitory" is feeling the heat. 

The Price of Growth 

Former Treasury Secretary Larry Summers on Wednesday told CNN's Chris Cuomo that the Biden administration was "behind the curve" when it came to addressing inflation. 
"I think we're speeding down the road at a really rapid rate," he said. "It's kind of a downhill road. And it's not going to be so easy to put the brakes on here. And that's why I'm concerned." 
This isn't surprising coming from Summers, who has been a bit of a canary in the coal mine when it comes to warning about the risks of inflation, but his comments reflect a more widely felt sentiment that the latest numbers mark a turning point in the Great Inflation Debate. 
This is the biggest challenge facing Team Transitory: as keeping the economy hot increasingly comes with some painful trade-offs, how do you make the case for staying the course? 
Many are taking a cue from Powell, who in his most recent speech chose to further explain his argument for why he thinks inflation is transitory, rather than back down. 
"Supply constraints have been larger and longer lasting than anticipated," Powell said. "Nonetheless, it remains the case that the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, specifically the effects on supply and demand from the shutdown, the uneven reopening, and the ongoing effects of the virus itself."
J.W. Mason, a fellow at the left-leaning Roosevelt Institute and a proponent of the transitory narrative, broke down the unprecedented nature of the situation in a tweet thread on Friday. 
Essentially, he explained, the fall in demand came at the same time as a massive shock to supply in the form of factory shutdowns and cuts to production. This meant that the government's efforts to bolster demand (i.e. extended unemployment benefits, stimulus checks, and quantitative easing from the Fed) ran smack dab into limited supply, a recipe for inflation. 
At the same time, in his view, boosting demand was necessary to avoid a full-blown recession, and it continues to be necessary in order to reach full employment and close the wage gap between low- and high-income earners. In other words, inflation is the necessary cost of economic growth in a world where supply constraints continue to hold back the recovery. 
Mason and others sympathetic to this argument also point to recent wage gains. According to the Labor Department, pay increased 1.5 percent in the third quarter, with lower-paid workers seeing the biggest gains in that period. Employees at restaurants, bars, and hotels saw their wages rise 8.1 percent and retail workers saw their wages rise 5.9 percent year-over-year. 
"Yes, prices are higher, but people got more income during this crisis than they've had in a long time," said Sahm. "They can pay those grocery bills. They're not happy about it, but there's more food being eaten." 

Wage Gains vs. Inflation 

Of course, inflation is cutting into some of those gains, but as Sahm added, price increases aren't experienced the same by everyone. If you're not buying a used car, for instance, you're not feeling the full brunt of that 6.2 percent increase. One-to-one comparisons miss that. 
In addition, simply comparing wage gains with inflation doesn't account for extra federal benefits such as the new Child Tax Credit, or the fact that the tight labor market has given workers more bargaining power to negotiate greater pay and benefits in the near future. 
"We are closing the wage gap," said Yakov Feygin, associate director of the Future of Capitalism program at the Berggruen Institute. "This is the first since the '90s or early 2000s that you're seeing the bottom end of the income spectrum actually making more and having more bargaining power."
Feygin stressed that recent inflation gains should be seen in the longer context of an underperforming economy.  
"At some level, we're paying the price for a very bad few decades," he said. "The analogy I make is that we haven't been running our engine at full throttle for a really long time, and because of that, it's cold."
Another one of the main arguments coming from Team Transitory is that even if inflation does continue to prove more persistent than expected, it doesn't follow that the Fed should raise rates or that the federal government should cut spending. 
That's why they emphasize the role of supply constraints, which have very little do with the overall money supply, and more do with the physical make-up of the economy.  
"People say the Fed should raise rates," Sahm said. "What exactly is that going to do? Is that going to make inflation go down if COVID spikes again? No."
Powell made a similar case in his most recent speech. 
"We understand the difficulties that high inflation poses for individuals and families,
particularly those with limited means to absorb higher prices for essentials such as food and
Transportation," he said. "Our tools cannot ease supply constraints."
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