Biden and the Fed Leave 1970s Inflation Fears Behind

Economists have struggled to understand the phenomenon, but they largely think inflation is being held down by a cocktail of aging demographics, changing consumer expectations and limited pricing power in a globalized world where consumers can search online to compare prices.

Market-based inflation expectation measures are hovering right around 2 percent, and consumer inflation outlooks have dipped slightly over the past decade, though one gauge ticked up in a recent reading. If buyers don’t expect higher prices, companies may find themselves unable to raise them, so whatever people anticipate can drive reality.

It’s also hard to see where a big and sustained spike in prices would come from, analysts said.

Airfares, apparel prices and hotel prices all took a hit in 2020 during the depths of the pandemic, and they’re likely to jump sharply as the economy reopens and consumers with money in their pockets take vacations and refurbish their wardrobes, said Alan Detmeister, a former inflation expert at the Fed who now works at the bank UBS.

Yet the price of goods that experienced a jump as workers shifted to home offices — from the category that includes laptop computers to the one that tracks cars — could fall back, weighing down overall gains. Categories that matter a lot to the overall index, like rent and health insurance, are both subdued and slow-moving.

In any case, a temporary bounce-back in prices is not the same as an inflationary process in which price gains continue month after month.

Even if prices do temporarily bounce, the Fed has pledged to be patient in the way it thinks about inflation. In years past — including under Ms. Yellen’s watch — it lifted interest rates before price gains had really picked up to head off potential overheating. The central bank’s new framework, adopted last year, calls for policymakers to aim for a period of above-2 percent inflation so that it hits its goal on average over time.

And besides stabilizing prices, Congress also tasks the Fed with trying to achieve maximum employment. Charles Evans, the president of the Federal Reserve Bank of Chicago, said earlier this month that $1.9 trillion in government spending would have the potential to help the Fed hit its inflation and job market goals faster.

“I’m hard-pressed to see the size of this leading to overheating,” he said.