The ominous uptick in consumer prices that began in the spring of 2021 triggered alarm bells. By fall, the future looked dark to many observers. A market strategist cited by Reuters warned that the surge in inflation would not be transitory, as the Fed and Biden administration were then promising. “Sticky and sustained” inflation when the country was “past peak growth” would constitute “stagflation," he said, reviving a term coined in the 1960s.
Yet there was no stagflation. The 2021-2022 episode turned out to be very different from the economic turmoil that bedeviled the U.S. economy from the 1960s into the early 1980s. Its brevity was one key difference. A second difference was a far greater volatility of relative prices. A third concerned the role of expectations. As this commentary will explain, these three differences, taken together, carry important lessons for policymakers.