What’s Driving Inflation?

We are grappling with high, broad-based and persistent inflation. It is worth asking: what happened? It’s part COVID and supply imbalances. It’s part fiscal. And it’s part monetary. Movements in any of these factors could have quieted inflation somewhat. But I’m not convinced any one of them is the whole story. For me, it’s the accumulation of so many inflationary pressures at once that likely tells the tale. The question is how long this can last. Persistence is the essence of inflation. Business leaders still see it as an episode, not a regime change. The water in the river may be high but it hasn’t yet breached the dam the Fed built to keep inflation expectations in line with our 2 percent target. Inflation should come down. But I don’t expect its drop to be immediate nor predictable. We’ve been through multiple shocks, and significant shocks simply take time to dampen. The Fed has the tools to bring inflation down and will persist until it does.