Inflation Is Here. The Big Debate Is, Will It Stay?

The U.S. Federal Reserve and bond market investors have traditionally been hard-eyed cops on the inflation beat. But as prices started to rise when the pandemic eased in early 2021 they remained unruffled, attributing the increases to “transitory” factors. Plenty of others did worry and some central banks even took action. Later in the year, as price increases reached levels not seen since the early 1990s, the Fed added some caveats to its calm and hinted at a willingness to change course. Even so, a debate continued over whether inflation would fade when the world returns to normal, or take on a life of its own.

In early 2020, the spread of the coronavirus triggered the steepest economic downturn on record. A year later, mass vaccinations and trillions of dollars in government stimulus led to a pickup in consumer spending in much of the globe. Supply chains took longer to rebound. Semiconductor production, for example, slumped during the 2020 lockdowns and then couldn’t be ramped up fast enough when demand for cars and electronics returned. Prices for those items jumped, as did airfares and hotel rates. Companies found themselves short of workers as they reopened, leading some to offer bonuses or boost wages and subsequently raise prices for consumers.