As the current exceptionally low level of inventories normalises, this could lead to some reversal of the price hikes we have seen in goods, pulling inflation back closer to target.
Still, supply-chain disruptions could linger well into 2022 and pricing intentions are very strong, suggesting that higher costs could be passed onto consumers.
But the big puzzle is the degree of labour-market slack. Despite US employment still around 5m jobs below the pre-pandemic level, unemployment has fallen sharply and there are widespread reports of labour shortages.
This is not unique to the US; the Bank of England is equally confused around the role of furlough in creating surprisingly strong wage pressure, but in the case of the UK, the impact of Brexit on reducing immigration is an additional factor.
There has been a hesitancy of people to return to work. This has been attributed to early retirement, worries around Covid, caring responsibilities and generous income support from the government.
The question is the extent to which participation rises now that unemployment benefits have expired and as Covid fears subside.
The Fed’s new framework (known as flexible, average inflation targeting) was deliberately designed to box itself in, given the previous persistent undershoot of inflation and uncomfortably low inflation expectation.
It never expected inflation to overshoot before maximum employment was reached. Now it has committed to no longer act pre-emptively, so it lacks the flexibility to respond to the current inflation shock without potentially disrupting markets.
Furthermore, this new approach risks dislodging previously well-anchored inflation expectations and setting off a wage-price spiral.
Lessons from the past
Despite worries around inflation, a return to the 1970s seems unlikely. Central banks appear more independent and have learned from the mistake of allowing inflation expectations to ratchet higher.
Should more persistent inflation pressure begin to emerge it seems likely that central banks will perform a policy pivot to prevent a serious outbreak. This could involve a more abrupt taper or sudden stop in asset purchases, followed by rate hikes.
But to draw this conclusion will likely take more time to assess how labour markets respond to economies attempting to fully reopen as government support is withdrawn.
However, a sudden move higher in longer-term inflation expectations could trigger an even more urgent response and would be potentially highly disruptive for markets.
Tim Drayson is head of economics at LGIM