The Great Debate is over. No, not the debate between Vice President Harris and former President Trump. I’m talking about the debate between Team Transitory and Team Persistent. Team Transitory believed that elevated inflation was a temporary phenomenon resulting from COVID-19 shutdowns. Team Persistent believed inflation could only be stamped out by vastly higher interest rates and an unemployment rate as high as 7.5%.

The genesis of the debate was the arrival of COVID-19 in the U.S. in January 2020. At the time, consumer prices were rising about 2.3% year-over-year. The short-term federal funds interest rate stood at 1.5%.

As the economy went into free fall, the Federal Reserve Board cut interest rates to zero by March.

Prices began rising in earnest in April 2021 as supply chain snarls caused product shortages. These shortages coincided with the passage of $1.9 trillion in American Rescue Plan income support.

The Fed took Team Transitory to an extreme. It held interest rates at zero for an entire year while inflation accelerated.

With annual inflation clocking in at 8.5% in March 2022, the Fed jumped to Team Persistent. It adopted the mantra of “higher for longer” interest rates. It put the pedal to the metal increasing rates from zero to 5.25% by August 2023.

The 2022 about-face occurred just five months before inflation peaked at 9.1% in August 2022. As supply chains unsnarled and the cash provided by the American Rescue Plan was spent, inflation rolled over. Last month, the consumer price roller coaster returned to the station. The 2.5% annual increase reported in August 2024 was indistinguishable from the pre-COVID level of January 2020 or the rate in March 2021.

To any student of history, the rise and fall of inflation was utterly predictable. One only had to look at World War I and World War II to see the parallels.

In wartime as with COVID, production of civilian goods was restricted. Soldiers and the civilians replacing them in weapons factories got paid but had nowhere to spend their money. The $2.2 billion CARES Act under Trump and the $1.9 trillion ARP under Joe Biden provided similar income support.

When the wars and COVID ended, pent up demand and enforced savings met limited supply. Inflation skyrocketed. When the savings were depleted and supply returned, inflation ebbed.

From 1918 to 1920, inflation ran in the mid-teens every year. Deflation set in with prices falling 16% over the next two years. The story was similar with inflation compounding in the double-digits from 1946-1948 yielding to modest deflation in1949.

Because COVID did not last nearly as long as the wars, the COVID cycle was shorter with a lower peak. Had the American Rescue Plan not put $1.9 trillion in people’s pockets in 2021, the cycle might have been even milder.

All in all, it took 17 months for the inflation rate to top out and two years for the rate to recede to prior levels. Team Transitory was right and the Federal Reserve seems to be back on board. The Fed’s interest rate reduction on Wednesday is both welcome and overdue.

Jeffrey Scharf welcomes your comments. Contact him at jeffreyrscharf@gmail.com.