Persistent factors have become more important drivers of U.S. inflation in recent months, which could call for a "stronger and longer-lasting policy response," a Federal Reserve Bank of San Francisco paper said Monday.
Using a 10-year rolling average measure, the paper found a rise in the persistence of inflation levels and inflation changes starting in mid-2019, nearly a year before the Covid-19 pandemic. By March 2022, "persistent shocks to inflation are about twice as volatile as transitory shocks," Fed economists Kevin Lansing wrote. "This result implies that persistent shocks are the more important driver of recent inflation movements."
It's also increasingly likely that longer-run inflation has drifted up, he added.
"The prospect that recent elevated inflation is being driven by persistent shocks raises the risk that inflation will remain above 2% for a longer period. In such an environment, a strong and long-lasting policy response may be needed to achieve the Federal Reserve’s goal of 2% average inflation over time," Lansing said.