13◼ REMARKS Bloomberg Businessweek March 8, 2021
Newsmax TV network on Feb. 8 that “the central reality of ’
is going to be major, major inflation, hyperinflation.”
Hyperinflationistas affect the debate by providing cover to
more circumspect but politically influential players such as
Republican Senator Pat Toomey of Pennsylvania, who chal-
lenged Powell during the Fed chief ’s testimony on Feb. 23.
“We are seeing quite elevated asset prices and signs of infla-
tion,” Toomey said, adding, “there are a lot of warning signs
that are blinking yellow.”
Inflation, which in the U.S. peaked at just under 15% in
1980, has somehow become scarier during its long absence,
like the monster in the basement. But back to reality:
Hyperinflation is people carting around stacks of bills in
wheelbarrows, central banks issuing new currency notes
with multiple zeros lopped off, people hurrying to the cash
register with food before prices go up again, retirement nest
eggs being wiped out. It’s a societal disaster.
That’s not in the cards for the U.S. Hyperinflation is
unofficially defined as an inflation rate of 50% or more a
month. In contrast, consumer prices in the U.S. have been
going up less than 2% a year since the 2007-09 recession. For
the 12 months through January, the increase in the price index
that the Fed tracks was just 1.5%, below the central bank’s tar-
get of 2%. In other words, the U.S. has a problem with infla-
tion, all right, but the problem is that it’s too low, not too high.
Is inflation rising? A bit. Consumer prices were falling last
spring, so comparisons this spring will be, ahem, inflated.
As for the longer term, the bond market’s expectation of
annual inflation over the next decade has shot up all the way
to ... 2.15%. You arrive at that number by subtracting the yield
on inflation-protected 10-year Treasury notes from the yield on
ordinary 10-year notes. Another measure, the median esti-
mate of consumer price index inflation in the Survey of
Professional Forecasters, is 2.2%. The professional forecast-
ers who are surveyed expect the Fed’s preferred measure,
which is the price index for personal consumption expendi-
tures, to rise 2.03% a year through 2031—almost smack dab
on the Fed’s target.
It’s conceivable that inflation will accelerate to 3%, 4%,
or 5% for a while because of post-pandemic splurging and
production bottlenecks, but the Fed has ways to halt inflation
of that sort from snowballing into hyperinflation. The first
step would be to stop buying long-term Treasuries and
mortgage-backed securities, a move that would cause long-
term interest rates to rise. The second would be to push up
short-term interest rates—a lot if necessary.
Higher rates discourage borrowing, which constrains
spending and investment. Suppressing growth is a crude but
ultimately effective way of chilling inflation. Higher rates also
lower the value of existing fixed-income securities, hence the
squeals of pain you’re hearing from the bond market.
The real risk of inflation getting much above target isn’t that
the U.S. becomes Venezuela but that the Fed overreacts and
accidentally causes a recession. If the Fed steps in too late and
the economy substantially overheats, “the likelihood is that
something adverse will happen, and therefore it’s better not
to do that experiment,” former Treasury Secretary Lawrence
Summers said in a Princeton webinar on Feb. 12.
The chance of a problematic inflationary overshoot—not
hyperinflation—is where reasonable people can disagree.
Powell acknowledges that excessive inflation can’t be dis-
missed but emphasizes that it’s still below target and unem-
ployment remains too high. “The economy is a long way from
our employment and inflation goals, and it is likely to take
some time for substantial further progress to be achieved,”
he said in prepared remarks to Congress in February.
Inflation is hard to predict because the expectations of
consumers and businesses play a big role in it. To some
degree, prices will go up if people think they will go up
and won’t if they don’t think so. In a series of papers begin-
ning in 1896, Irving Fisher argued that expectations of the
future inflation rate are influenced by observations of the
past inflation rate.
A working paper released in October demonstrates the
importance of inflation expectations. It focuses on the early
1980s, when the Fed under Chairman Paul Volcker raised
rates to as high as 20%, caused a deep recession, and wrung
inflation out of the U.S. economy. Although states’ local unem-
ployment rates were different, their inflation rates were sim-
ilar. That’s an indication that their inflation was less affected
by their economic conditions and more by expectations of
future Fed policy, which affects all states equally, says one
of the authors, Emi Nakamura, a professor at the University
of California at Berkeley. “Fundamentally it’s a confidence
game,” says Nakamura, who in 2019 won the John Bates Clark
Medal for the best American economist under 40.
In a strange way, then, the hyperinflation talk does
matter—because perception can become reality. The more
Powell tries to reassure people that inflation isn’t a big prob-
lem, the more he alarms those who think he’s dangerously
wrong. If that contagious meme spreads and inflation expec-
tations start to float higher, Powell & Co. could be forced to
raise rates prematurely, puncturing the inflation balloon at
DATA: BUREAU OF LABOR STATISTICS the cost of growth and jobs. <BW>Consumer Price Index
Year-over-year change
Energy shock
of the early ’70sFed breaks
inflation feverPostwar inflationary boom
18%
1260- 1/1947 1/1960 1/1980 1/2000 1/
2%2% inflation inflation
becomes the
new normal