Watch: Team Transitory Collapses as Yellen Surrenders on Inflation

So much for the idea that inflation would be transitory.

Treasury Secretary Janet Yellen on Thursday said she believed it was time to retire the word transitory when it comes to describing inflation and warned of the possibility that the Omicron variant could exacerbate inflation.

“I am ready to retire the word transitory,” Yellen said in an interview with Reuters. “I can agree that that hasn’t been an apt description of what we are dealing with.”

 

On Tuesday, Fed chairman Jerome Powell said he was ready to “retire” transitory.  Powell was one of the first government officials to use the word transitory to describe inflation. On Tuesday, Powell said it was not meant to indicate that inflation would be “short-lived” but rather to indicate that the transition to faster-rising prices was based on temporary economic constraints that would eventually be overcome.

That explanation, however, did not quite align with the way Powell and Biden administration officials used the term earlier this year, often clearly implying that inflation would likely fade without intervention from the Fed. President Joe Biden went so far as to claim that no “serious” economist was worried about “unchecked inflation.” Yellen, who was Fed chair before Powell, said several times that inflation might last several months but not much longer than that.

One reason Yellen and Powell were caught offsides by inflation is that they underestimated the supply-side constraints of the pandemic and the Delta variant wave of infections. Instead, they focused economic aid on supporting demand in the economy, in part because of the widespread belief among Biden administration and Fed officials that the Great Recession’s economic damage was prolonged because too little demand-side stimulus was provided, In short, they fought the last economic war instead of the pandemic crisis.

Both Yellen and Powell have changed their views in light of the past year’s experience. They now see that the pandemic and the public’s response to rising infections can be inflationary along a number of vectors. Out-of-work Americans may hesitate to rejoin the workforce or stay in jobs that have a lower risk of infection, even if the economic need and compensation is greater elsewhere. Global supply chains can freeze up when factories or ports in Asia are shuttered to fight outbreaks. And consumers shift demand to goods from services.

Yellen on Thursday warned that the omicron variant could also have inflationary effects.

“Now the new variant, the Omicron variant, the pandemic could be with us for quite some time and hopefully not completely stifling economic activity but affecting our behavior in ways that contribute to inflation,” Yellen said. “This could again exacerbate supply chain and inflation problems.”