As anyone who grew up in the 1970s knows, there are both objective and subjective elements of inflation. The objective elements consist of things like supply chain bottlenecks and labor shortages that will undoubtedly be fixed with reasonable efforts over time. The subjective element, which is more important in the long run, revolves around the expectations of the public. Once workers and consumers have concluded that price increases are inevitable, they will adjust their habits accordingly, and only dramatic action, probably resulting in a recession, will break the cycle. What, then, should be done?
The key here is messaging. Both the White House and the Fed need to look tough and determined on inflation without actually doing anything to damage the economy. Making a big deal about ending bond purchases, which are unnecessary at this point, is a good start; since the markets have changed their focus to inflation, this can probably be done without creating a taper tantrum and driving the markets down. Raising interest rates, on the other hand, will not kill the booming demand for goods, which is being driven by savings; it will only restrict investment and choke off supply-based solutions.
Fox News is going to bang on about inflation for self-interested reasons, so the message won’t get through to everyone, but the vast majority of Americans get their information elsewhere. If the optics are handled properly, the problem will disappear.