With year-over-year consumer price index (CPI) inflation in November 2021 at 6.8 percent,1 inflation is in the headlines. The issue is whether such high inflation is transitory, given that the CPI is dominated by categories of goods and services whose prices reflect only the rapid recovery of the economy and COVID-19 pandemic-related supply disruptions. As such, the Federal Open Market Committee (FOMC) of the Federal Reserve should allow inflation to pass through to the price level and await a return to the longer-term inflation rate of 2 percent. Certainly, there are outsized increases in some categories. In November 2021, energy prices (year-over-year) rose 33.3 percent, with gasoline up 58.1 percent and natural gas up 25.1 percent.2 Prices of used cars and trucks rose 31.4 percent.3 Such increases reflect the working of supply and demand and should be accommodated.

Although much of inflation is transitory, determining the level at which inflation will settle down requires knowing the proportion of underlying inflation that is created by monetary policy.

And to know that proportion, one must first describe current monetary policy, especially how it changed in response to the pandemic. One then needs a framework (model) that forecasts inflation. Unfortunately, there is no consensus on the nature of inflation. Is inflation a nonmonetary phenomenon whose control turns on how the FOMC controls the amount of slack in the economy? Alternatively, is inflation a monetary phenomenon whose control requires control over money creation?

The monetary policy announced by Chair Jerome Powell in his August 2020 Jackson Hole speech positions the FOMC on the side of inflation as a nonmonetary phenomenon. The policy is a clear break from the monetary policy developed in the Volcker–Greenspan era. Moreover, such an aggressively expansionary policy has not been seen since the 1970s. Given the uncertainty over the nature of inflation and the monetary policy required to control it, I suggest that the FOMC announce benchmarks for nominal GDP growth that over time align with the FOMC’s long-term inflation target. Such benchmarks would serve what economist Scott Sumner calls “guardrails,”4 which in this case would prevent misunderstanding about the nature of inflation from causing a sustained rise in inflation.