Raphael Bostic, Essay: Observe and Adapt, Appropriate Monetary Policy in the Face of Inflation

“Instead of simply waiting out supply and production problems, many executives are starting to seek new or redundant suppliers. These businesses are changing inventory systems from “just in time” to “just in case,” and taking other steps to insulate themselves from future severe supply disruptions. Undoubtedly, many of these efforts involve tradeoffs between efficient, lean production methods and costlier but less vulnerable supply chain configurations. If enough firms take those types of decisions, then they could influence long-run inflation expectations and subsequently actual inflation.”

“Many of you probably wonder why we pay so much attention to what people think inflation will be. Put simply, the more likely it is that businesses and workers begin to believe that inflation will remain elevated, the more likely they are to alter their habits in ways that can lead to inflation. For example, should workers ask for markedly higher wages because they think the prices of groceries and other staples will rise significantly, then that can lead to increased costs that businesses pass through in the form of, yes, higher prices for those and other goods.”

“As for being adaptable, I will adjust my view of appropriate policy based on my observations. If monthly price changes decline, the risk of longer-run inflation expectations becoming unanchored will fall, which will be good news indeed and should not warrant a change in what I think our policy approach should be, which is currently three interest rate hikes this year. By contrast, if monthly changes remain high or even increase, then inflation expectation risks will rise as well, which would lead me to adjust my view in the direction of more aggressive action. Again, in monitoring inflation, my watchwords are observe and adapt.”