Have we just passed peak inflation? That was the question economists were debating last week, when the US Labor Department published the latest consumer price inflation rate. The index in June was 9.1% above the level a year before — the highest figure since December 1981.
Is that the top? We are all entitled to guess, of course. But the idea that the average economist could know the answer to this question is laughable. Only a handful — former Treasury Secretary Larry Summers, most famously, but also my Hoover Institution colleague Michael Bordo and my old friend and fellow Bloomberg Opinion columnist Mohamed El-Erian — correctly foresaw in early 2021 that inflation was about to take off. And even they did not venture to predict that inflation would exceed 9% by now.
Mainstream economists, as well as central bankers, had come to believe that inflation was driven not by the growth of the money supply and the velocity of circulation but by the expectations of consumers — which in turn could be “anchored” by a credible inflation target. If the Federal Reserve said that inflation would be 2%, then it pretty much would be. In any case, the problem for most of the last 20 years was its tendency to be below, not above, that goal — hence the innovation of an “average inflation target”, which would implicitly allow inflation to be a little above 2% for a time, to compensate for having been a little below it for a time.