Shocks, Crises, and False Alarms

CHAPTER 13 Living with Upside Inflation Bias

Though there has been no postpandemic inflation regime break, and though we think the risk of one remains low (as argued in the preceding chapter), that doesn’t mean cyclical inflation will return to a pre-2020 pattern. That pattern, decidedly tilted to the downside, is likely a thing of the past.

For much of the 2010s, inflation struggled to reach the Fed’s 2% target and at times was uncomfortably low. But there is a strong likelihood that this downward bias of cyclical inflation has reversed into an upward bias as an era of tightness in the real economy frequently pushes inflation above the 2% policy target. We see this upside bias as persisting for years, even as price growth will continue ...