How inflation fears can turn into the real thing

How bad could inflation get in the United States? Economist Narayana Kocherlakota has some answers.

Kocherlakota says a return to 1970s levels of inflation is unlikely. But he also offers a cautionary note.

Inflation refers to the rate of change in the prices of goods and services. But different goods’ prices change at different rates. That means the inflation rate depends on how one averages the prices of all of the goods and services in the economy.

A sizable proportion of Americans today are old enough to remember the Great Inflation of the 1970s. Prices for everyday items soared, and at an increasing rate—peaking at 15% in early 1980.

So when the inflation rate, which has remained under 3% for a decade, nearly doubled from March to May of this year and continued to climb in June, it seemed reasonable to ask: will rising prices spin out of control again?

Kocherlakota, an economics professor at the University of Rochester and a former president of the Federal Reserve Bank of Minneapolis, says that’s unlikely.

“The increase in inflation is a short-term blip,” says Kocherlakota. He attributes the blip to pent-up demand and a rise in hiring following the yearlong COVID-19 slowdown in production. He adds, “It’s a small price to pay for the fact that we’re providing more employment to so many more people.”

But Kocherlakota offers one cautionary note: if people begin to believe that high inflation will be a persistent, rather than a transitory, phenomenon, they will begin to act on that assumption, feeding a cycle of rising prices and wages. That’s the kind of crisis Kocherlakota hopes we can avoid with a better understanding of the current economic environment.

Here, he explains his thinking on today’s inflation:

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