From "Deflationary misery" to "inflation pain" the Fed's story over last decade

The long narratives are often quite different from short-term reality. Remember the post-GFC period when our greatest fear was deflationary misery. There was deep discussion on the pain, potential and actual, from deflation. The Fed, other central banks and academics spent countless hours discussing the issue of being policy constrained at the lower bound. The view from MMT advocates stated that inflation could never be a problem because it was so easy to constrain relative to deflation. The was little acceptance of the view that deflation is not always bad.

There is now no perceived deflation misery but real inflation pain for everyone. Businesses are facing pricing confusion and the potential for profit squeezes if they are unable to pass through price increases from good or labor increases. Labor is seeing real wages decline. Wages are going up, but the increases are not uniform, nor do they offset the short-term inflation spikes.

A common theme is that the Fed was not prepared for deflation risks and is not prepared for inflation pain. Using a precautionary view, it is believed that waiting will prove to be an effective response. Caution is good, but like any complex system there is uncertainty on the response time to policy so that overcompensation is real. The Fed actions today may not have an impact for nine months. Forward guidance and announcement effects attempt to reduce policy lags, but they still exist.

The overall investment them is that clear and present danger will likely be addressed quickly but anything short of a large shock will be addressed slowly and lead to real and financial trends. Caution can lead to policy errors.