Rising oil prices could compound any consumer-driven inflation. Indeed the price of oil has haunted the Fed before. A series of oil shocks contributed to the ratcheting up of inflation during the 1970s, but the Burns Fed chose to focus more on the CPI excluding oil. Then it excluded surging food prices and the idea of “core” inflation took shape. Subsequently, more and more items were excluded. Eventually, however, the Fed recognised that all the supposed transitory sources of inflation had spread everywhere and double-digit inflation had leaked into the “core”.
Is the Fed making the same mistake again by justifying its extremely patient approach on the basis of transitory inflation? That question is being asked just as it risks being caught in today’s political mood and supporting the administration rather than leaning against the macroeconomic implications of its actions.
Human biases are also feeding the “transitory” narrative. Just one example regards inflation expectations. These have proven near impossible for economists to model. Hence, the profession will overweight the bottom-up micro components – they are easier to predict. Furthermore, model-based analyses find it difficult to predict the turn in inflation if prompted by a paradigm shift that raises expectations.
With a few years of very low inflation expectations behind us, we are ill-prepared for a dramatic shift. That is especially the case as many asset prices today rely on the monetary policy support of low rates and abundant liquidity that has been a hallmark of the post-2008 world.

Already, many sources of rising prices are filtering through into the US economy. Even if they are transitory on paper, they may feed into expectations just as they did in the 1970s. The risk then, is that even if they are only embedded for a few months they may be difficult to contain, especially with stimulus so high.