What If Inflation Today Is Out of the Fed’s Control?
The traumatic 1970s cycle was mostly demand-driven. The type we have now is mostly driven by supply shortages, and that’s not good news.
The Ikea indicator.
Photographer: Michael M. Santiago/Getty Images
If any pollster ends up surveying the least popular words of 2021, “transitory” and supply chain” might make the list just behind “inflation.” What makes our situation so frustrating isn’t just that we haven’t seen a string of monthly price increases like this one in decades. It’s also that the type of inflation we are experiencing is particularly painful.
Think back to the basic explanation of inflation: It’s “too much money chasing too few goods.” That’s slightly too simple: It would be more precise to say that it’s “too much spending chasing too few goods and services.” When prices rise because people are spending more, that’s demand-driven inflation. When they rise because of shortages or setbacks to productivity, it’s supply driven. And, of course, prices can rise for both reasons.