Why Paul Krugman is wrong to still believe inflation was transitory
Jack Elbaum
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Constant refrains that we ought not be worried about inflation because it was merely “transitory” began to fade from the public discourse almost two years ago, as it became abundantly clear inflation was here to stay. But that did not stop economist/columnist Paul Krugman from claiming yesterday that inflation was, in fact, transitory — despite our own eyes telling us an entirely different story.
Krugman tweeted, along with a graph: “Gotta say it: the original Team Transitory proposition was that inflation would subside without the need for a big rise in unemployment. Not looking so wrong now.” He added a few caveats, writing, “This took much longer than expected. And the Fed did raise rates a lot.”
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https://twitter.com/paulkrugman/status/1679134164782661641?ref_src=twsrc%5Etfw
On the narrow point, Krugman may be correct. As the inflation rate has declined, we have not seen a spike in unemployment despite there often being an inverse relationship between the two in the short run. Even so, it remains unclear whether we are headed for a recession or not, which could certainly lead to rising unemployment. On this, we can wait and see.
The main issue with Krugman’s tweet, however, is that “the original Team Transitory” argument did not have to do with the lack of an unemployment spike. That was never considered the measure of whether or not we could consider inflation transitory for anyone except Paul Krugman — who, to be fair to him, wrote that in a September 2021 opinion piece.
Rather, the vast majority of those who believed inflation was transitory used it as a synonym for “temporary” or “short-term.” More specifically, advocates centered their argument on inflation simply staying a bit higher than 2%, the Fed’s inflation target, for a period of time as a corrective to low inflation over the prior few years. It was therefore not considered necessary to raise interest rates, they said.
The chairman of the Federal Reserve, Jerome Powell, explained in April 2021 that “We want inflation to run a little bit higher than it’s been averaging in the last quarter century. We want it at 2%, not 1.7%.” The White House argued that the impact of slight inflation “should fade over time as the economy recovers from the pandemic” and we will “see some increase, but from historically low to more normal levels.” Treasury Secretary Janet Yellen said we would see “somewhat higher inflation over the next several months.”
What actually happened, though, was that inflation rose significantly, not just slightly above the 2% target, the spike was prolonged, and the Fed had to raise interest rates — a lot.
This means each element of the “transitory team’s” argument was incorrect.
One could bring up the American Institute for Economic Research’s relevant definition of “transitory inflation.” (There is another definition far less relevant to this case.) It posits that when a period of high inflation is followed by a period of low inflation, offsetting the high inflation and bringing the average back to the target, that period of high inflation can be considered transitory.
We need to wait and see if this happened and our inflation could be considered transitory under this fair definition. But even if it did, it would be a wholly different explanation of why the inflation was transitory than “the original Team Transitory” Krugman references. The original line was that the high inflation was the corrective to previous low inflation. Under the theory based on the AIER definition, though, the high inflation would need a correction itself.
As such, we can consider it simply wrong to still term the inflation the U.S. experienced over the past few years transitory. This is the case only because it did not meet the conditions of those who called it transitory at the time, but also, maybe even more importantly, because most average people took transitory to mean short and mild. After all, they were not engaged in these technical debates. Three years later, though, and with a price level that has risen 14%, one would be hard-pressed to consider that short and mild.
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Jack Elbaum is a summer 2023 Washington Examiner fellow.