Central bankers and most economists failed to anticipate the sharp increase in inflation that began in 2021, and public policymakers were slow to respond after insisting that price pressures were “temporary,” a new paper co-authored by former Federal Reserve Chair Ben Bernanke states.
The Fed misjudged the economic effects of pandemic-era fiscal programs, which explains why many failed to accurately forecast the inflation that resulted from the stimulus and relief measures, including the March 2020 $2.2 trillion CARES Act, the December 2020 package that consisted of $900 billion in COVID-related spending, and the March 2021 $1.9 trillion American Rescue Plan.
The CARES Act, signed by former President Donald Trump, was sufficient enough to strengthen businesses’ and households’ balance sheets and support their ability to spend in the future, the paper claims.
“Overall, as a share of GDP, the headline costs of these three COVID-era fiscal packages were about 4-1/2 times the size of the American Recovery and Reinvestment Act (ARRA), enacted in response to the 2008 financial crisis and the ensuing recession,” Bernanke and economist Olivier Blanchard wrote in the academic paper, titled “What Caused the U.S. Pandemic-Era Inflation?”
However, looking back at the coronavirus pandemic, Bernanke and Blanchard asserted that the inflation bursts were driven by several shocks, such as the dramatic rise in commodity prices, demand shifts (from services to goods), and labor tightness.
But while the economists concede that wage growth had little effect on inflation in early 2021, the paper purports that labor costs increased over time and have become more entrenched in current inflationary pressures.
“The effects of tight labor markets have begun to cumulate,” the paper noted, adding that they will likely “grow and will not subside on its own.”
“The portion of inflation which traces its origin to overheating of labor markets can only be reversed by policy actions that bring labor demand and supply into better balance,” they wrote.
As a result, the Fed has more work to do to curb inflation.
“Labor market balance should ultimately be the primary concern for central banks attempting to maintain price stability,” the paper said.
Bernanke now serves as a distinguished senior fellow at the Brookings Institution. Blanchard, who previously worked as the director of the International Monetary Fund’s research department, is a senior fellow at the Peterson Institute for International Economics (PIIE).
In January 2021, the consumer price index (CPI) was 1.4 percent. The annual inflation rate started to climb in March of that year, shooting up to 2.6 percent before peaking in June 2022 at 9.1 percent. Since then, the CPI has slowed to 4.9 percent, and the Cleveland Fed Bank’s Inflation Nowcast expects the May CPI to ease to 4.1 percent.
Annualized average hourly earnings for all U.S. employees have been elevated throughout the pandemic as employers enticed candidates with higher pay, hovering around 5 percent. Wage gains have been gradually coming down since peaking at 5.9 percent in March 2022, coming in at 4.4 percent in April.
But real wage growth (inflation-adjusted) has been negative for the past two years.
Soft Landing and Labor Markets
Since the central bank’s tightening cycle began in March 2022, Fed Chair Jerome Powell argued that a soft landing—a moderate economic slowdown, disinflation, and a labor market intact—is possible.
“I continue to think there’s a path to getting inflation back to 2 percent without a significant economic decline or significant increase in unemployment,” Powell said during a post-Federal Open Market Committee (FOMC) policy meeting press conference in February.
But Bernanke and Blanchard posit that the U.S. economy might need to slow further to clamp down on inflation.
“Looking forward, with labor market slack still below sustainable levels and inflation expectations modestly higher, we conclude that the Fed is unlikely to be able to avoid slowing the economy to return inflation to target,” Bernanke and Blanchard explain in the paper.
The paper states that the Fed’s 2 percent target rate could be achieved if labor market slack falls below 1 over the next two years. This metric monitors the number of job openings for each unemployed jobseeker, so if it dips under 1, it signals that more out-of-work individuals are competing for jobs than there are open positions. It presently sits at 1.6.
“Allowing (the ratio) to remain near current levels does not bring inflation down in our projections. Indeed, because an extended period of inflation raises long-term inflation expectations, it leads to slowly increasing inflation,” Bernanke and Blanchard said.
Bernanke appeared alongside Powell at the Perspectives on Monetary Policy panel discussion at the Thomas Laubach Research Conference on May 19. During the event, Powell suggested that labor market slack didn’t play much of a factor when inflation first spiked in early 2021. However, moving forward, he does believe that “labor market slack is likely to be an increasingly important factor in inflation.”
Meanwhile, despite many expectations suggesting that the unemployment rate needs to climb a few percent higher from its current level of 3.4 percent, Powell conceded during his semi-annual “Monetary Policy Report” to Congress that the labor market doesn’t need to be decimated to restore price stability.
Does this mean interest rates need to be higher? That’s the discussion many Fed officials are having.
St. Louis Fed Bank President James Bullard expects two more rate increases this year. He told an American Gas Association financial forum in Florida that “we’re going to have grind higher with the policy rate in order to put enough downward pressure on inflation and to return inflation to target in a timely manner.”
Bullard isn’t a voting member of the FOMC.
In a May 22 interview with CNBC, Minneapolis Fed Bank President Neel Kashkari, a voting member, said it was “a close call” whether to raise rates or hit the pause button at the June FOMC meeting.
According to the CME FedWatch Tool, investors mostly expect the Fed to slam the brakes on rate hikes.
But if the central bank does opt for a rate pause, it might not mean the tightening cycle is over, Kashkari says.
“Some of my colleagues have talked about skipping. Important to me is not signaling that we’re done,” he told the business news network. “If we did, if we were to skip in June, that does not mean we’re done with our tightening cycle. It means to me we’re getting more information.”
The Fed must be “extremely mindful” of when higher interest rates begin to affect the broader economy significantly, warns San Francisco Fed Bank President Mary Daly. The time “is getting nearer,” she said at an economic symposium at the National Association for Business Economics and Banque de France on May 22.
“And when you add the credit tightening that we’ve been seeing to that, it means that there’s a lot of factors pulling back the reins on the economy, and that’s why we have to be so critically data-dependent because if we think it’s not here yet and then we tighten too much, we can easily create an unforced error where we’ve over tightened.”
Article cross-posted from our premium news partners at The Epoch Times.
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Two Storms, One Harvest
Every food crisis in living memory has been a one-shock event. The 2008 price spike was a commodity bubble. The 2020 shortages were a logistics failure. The 2022 grain scare was a war on one exporter’s ports. Each time, the system bent, adjusted, and recovered, and each time the experts assured us afterward that global markets are simply too big and too diversified to fail.
What nobody in Washington seems eager to discuss is that 2026 is shaping up to be something the modern food system has never actually faced. Two independent shocks, one climatic and one geopolitical, are converging on the same harvest cycle at the same time. Not sequentially. Simultaneously.
Start with the weather. The Pacific Ocean is currently building toward what forecasters now openly call a record event. NOAA’s Climate Prediction Center puts the odds of at least a strong El Niño near 88 percent, with roughly two in three odds it reaches “very strong” status, the tier reserved for perhaps three or four events in the entire satellite era. Every major global model now projects a median peak in Super El Niño territory, and most of them project it exceeding the 2015-16 event, which until now held the modern record. Sea surface anomalies were already brushing the super threshold in mid-July, months before these events normally peak. The atmosphere has already shifted into El Niño mode, and the event is forecast to crest in late fall and early winter.
This is not about “climate change.” It’s about the standard cycles of weather, and the cycle we’re currently in is one that has likely devastated societies in the past. We’re better prepared as a society today, but not all Americans are equally prepared.
Serious households have started doing the quiet math on their own. Grocery bills tell part of the story, and the forecast maps tell the rest, which is why long-term food storage has moved from fringe hobby to mainstream line item in the family budget, with established suppliers like Heaven’s Harvest seeing demand from people who five years ago would have rolled their eyes at the idea. That instinct is not paranoia. It is pattern recognition, and the pattern is worth walking through carefully.
Editor’s Note: Heaven’s Harvest IS a sponsor, but the warnings of this article are real and would be written even if we didn’t have a survival food sponsor. With that said, those who take advantage of what they offer can use promo code “Patriot” for 15% off.
The Fertilizer Clock Is Already Running
While the Pacific warms, the second shock has been unfolding in the Strait of Hormuz. The conflict with Iran turned the world’s most important energy chokepoint into a contested waterway, and the consequences reach far beyond the gas pump. Roughly a third of global fertilizer trade moves through Hormuz, and the disruption sent urea prices up 86 percent year over year by March, with a 53 percent jump in a single month.
The World Bank projects energy prices rising about 24 percent in 2026 and fertilizer about 31 percent. By its own accounting, fertilizer prices ran 35 percent higher in the first five months of this year than the same period last year.
Here is the mechanism the nightly news will not explain. Fertilizer is not a grocery item. It is a time-delayed input. The nitrogen a farmer in Iowa or Punjab could not afford to apply this spring does not show up as a problem this spring. It shows up as a thinner harvest six to twelve months later.
The World Bank’s own food security brief concedes that the effects of reduced applications earlier this season “are likely to become visible only later in harvest outcomes.” Translate that from institutional language into plain English and it means this. The damage is already done, it is already in the ground, and we are simply waiting for it to arrive on the shelf.
Now check the calendar. Six to twelve months from the spring planting season lands us squarely in late 2026 and early 2027. Which is precisely when the strongest El Niño in the instrumental record is forecast to peak, bringing its signature droughts to Southeast Asia, Australia, southern Africa, northern Brazil, and South Asia, the very regions that grow the world’s rice, sugar, and oilseeds.
The World Bank warns openly that a strong El Niño “could disrupt multiple crop belts simultaneously” on top of the conflict-driven input costs. Their baseline projection assumes the Middle East disruptions ease by autumn. What in the last two years of Middle East history suggests that assumption is safe?
The System Has No Slack Left
The comfortable answer is that global markets always adjust. But adjustment requires slack, and the slack is gone. Global cereal production is expected to decline from last year’s records even before El Niño does its work. The UN World Food Programme, hardly a den of right-wing preppers, is calling this the most significant disruption to its supply chains since Covid and the invasion of Ukraine, and its supply chain director put the stakes bluntly.
Today’s supply chain challenges are tomorrow’s hunger crisis.
There is also a political dimension that markets cannot price. When food gets scarce, governments do not behave like economists. They behave like politicians. Export bans, hoarding mandates, and panic buying at the national level turned the modest rice shortfall of 2008 into a global crisis, and analysts are already warning that import-dependent nations are the first dominoes.
The 2015-16 Super El Niño, a far weaker event than what is now forecast, threw tens of millions into food stress across Africa and Asia. This one is projected to be stronger, and it arrives with fertilizer already rationed by price and shipping lanes already contested by missiles.
What Joseph Knew
Scripture does not treat preparation for lean years as faithlessness. It treats it as wisdom delivered in advance to those willing to act on it.
Behold, there come seven years of great plenty throughout all the land of Egypt: And there shall arise after them seven years of famine; and all the plenty shall be forgotten in the land of Egypt.
Joseph did not respond to that warning with a hashtag or a committee. He stored grain during the years of abundance, and when the famine came, Egypt stood while its neighbors begged. The lesson is not that famine is certain. It is that the time to prepare is precisely when preparation still looks optional.
Nobody who filled a pantry in a year of plenty has ever regretted it, and nobody standing in an empty aisle has ever been glad he waited for certainty.
None of this calls for panic, and panic is the enemy of sound judgment anyway. It calls for the same unglamorous prudence our grandparents considered ordinary. Keep some cash margin, know your local growers, and put real food in deep storage while it is cheap and available, because the entire arc of this story is that cheap and available is a closing window.
Families looking for a straightforward place to start can visit Heaven’s Harvest and use promo code Patriot for 15 percent off long-term storable food. The forecasts may yet soften, the strait may yet reopen, and we should pray they do. But hope is a fine thing to hold and a foolish thing to eat.
