As inflation measures reach their highest readings in more than a decade, the Federal Reserve faces a crucial test. Officials have so far emphasized that this is a temporary surge, driven by pandemic-related shortages and supply-chain disruptions, and so there is no need to raise rates in response to it. They need to make clear that interest rates won’t increase even if the rise in inflation lasts longer than expected.
The view that inflation is transitory is a reasonable thesis given the challenges associated with bringing the entire U.S. economy back online after an unprecedented shutdown. Yet precisely because this situation is unprecedented — both in the scale of the economic downturn and the size of the government response — it’s impossible to tell how large the spike in inflation will be, or how long it ought to take the economy to get through it.