Two months of sharply rising prices have raised concerns that record-high government financial aid and the Federal Reserve’s ultra-low interest rate policies — when the economy is already surging — have elevated the risk of accelerating inflation. In May, consumer prices rose 5% from a year earlier, the largest such year-over-year jump since 2008. Many economists see the recent spike as temporary. Others say they worry that higher consumer prices will persist. Jason Furman, a Harvard professor who was President Barack Obama’s top economic adviser, thinks the reality is more complicated. He does, however, lean toward the higher-inflation-will-persist camp. Furman notes that while most economists expect inflation to slow from its current quickened pace, not all think it will fall back to the Fed’s preferred level of 2% a year. The Associated Press spoke recently with Furman about why higher inflation might prove only temporary, why it might persist and whether a little more inflation is all that bad. The interview was edited for length and clarity. ___ Q. WHAT’S DRIVING INFLATION UP, AND DO YOU THINK IT WILL PERSIST? A. There’s been a lot of very temporary inflation from a set of quirks related to the economy’s reopening. For example, used car prices have absolutely soared, and other prices are getting back to where they were pre-pandemic. I don’t think anyone thinks the recent rate of price increase is going to continue. The question is, how much does it slow down? Does it slow down all the way back to the 2% increase every year we used to see? Or does it slow down less than that, and we’re left with something more like a 3% increase every year? ___ Q. HOW BAD WOULD 3% INFLATION BE? IS IT SOMETHING WE REALLY NEED TO AVOID? A. I don’t actually think 3% inflation would be terrible, but it depends. If policymakers tried to lower inflation from 3% to 2%, (by raising interest rates), that could be pretty painful. If wages don’t keep up with prices, that would also be troubling. But if we want to operate the economy, year in and year out, at a higher inflation rate going forward, I don’t see that as a problem. But I do think it’s important to make policy based on the most realistic and accurate expectations for what’s happening in the future. ___ Q. BEYOND THE ECONOMY’S REOPENING, WHAT MIGHT DRIVE A MORE SUSTAINED BOUT OF INFLATION? A. I think the four reasons why you might worry that inflation is going to be more persistent are, No. 1, there are some shoes that haven’t dropped yet. The biggest of them being the price of shelter — that’s rent. And then it’s something called owner’s equivalent rent, which is what it costs a homeowner to live in their home. (Both rents and home prices have risen sharply.) Second factor is some prices are sticky. That means they don’t adjust really quickly and right away. A lot of prices change once a year, and you’re going to see more of those price changes over time. Wages also tend to be sticky. A lot of employers might in September decide on new wages for January. The third factor is that it’s likely that demand continues to exceed supply through the rest of the year. People […]

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