The rate of inflation in the U.S. is at its highest level in three decades, breaking a long stretch of modest pressure that predates the service of most national policymakers (with some notable exceptions, of course). Fortunately, the staff running the Penn Wharton Budget Model (PWBM) have provided a timely and accessible refresher for the uninitiated of what it could all mean. Their modeling is a useful reminder that price stability should never be taken for granted.
The inflation environment was shifting even before Congress passed the highly stimulative $1.8 trillion COVID response bill in March 2021. Last year, Federal Reserve Chairman Jerome Powell engineered a modest loosening in inflation targeting by announcing that periods of average price rises below the 2.0 percent target could be offset, temporarily, by inflation above the target. The goal is now a multi-year average that is close to the agreed-upon objective. It was adopted in response to the sustained spell of very low inflation that followed the 2008-2009 financial crisis.
Read Full Article »