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As Always, Inflation Is Lurking

From the Wall Street Journal:

With Economy Poised for Best Growth Since 1983, Inflation Lurks

That damn inflation! It's always lurking.

But as long as we're on the subject of inflation, something is about to happen that you'll probably hear about many, many times over the next few months. So you might as well hear about it now.

It's this: thanks to unusually low inflation at the start of the pandemic last year, the headline inflation rate for the next few months is going to be unusually high. This is not because inflation is actually high. It's just a mechanical result of the arithmetic. It's as if you were comparing your electricity usage to a year ago when you were on vacation for a week. It would look like your usage was up 25%, but it's not. It's just a mechanical result of the previous year being artificially low.

Here's a chart that will either confuse you or make things clearer. Inflation is actually calculated as an index in which the average price between 1982-84 is set to 100. Here's what the CPI index looks like over the past few years:

The point here is simple: Even if the inflation index in April 2021 is precisely on the trendline of 1.6% growth, it will artificially look higher because the year-over-year comparison is with April 2020, which is in the red dip.

There's not much to do about this except to ignore the inflation numbers for the next few months. One alternative, I suppose, is to compare the current index to the one two years ago, and then divide by two to get an annual rate. That's unofficial, but probably gives a better idea of what the real inflation rate is. I'll try to remember to report that whenever I post about inflation.

One other thing: all the various forecast metrics suggest that inflationary expectations are still restrained. There's bound to be some upward pressure as the economy opens up this year, but nothing substantial.

23 thoughts on “As Always, Inflation Is Lurking

  1. bbleh

    There's not much to do about this except to ignore the inflation numbers for the next few months.

    Oh, ok, I'll get a memo out right away to the various MSM news desks and talk shows, and to all Congressional offices and campaign consultants, just so they know.

    But meanwhile, in case the memo happens not to get to one or two of the right desks, we might perhaps get ready for, say, an unending deluge of hysterical foaming at the mouth from pretty much everyone connected to the financial "industry," the Republican Party, or any media personality seeking attention (which would be [checks notes] all of them).

    1. Ken Rhodes

      Every once in a while I REALLY miss the "Like" button.

      Please consider this reply as my "Like" for your comment.

    2. golack

      They'll try. But it will only really affect those who live through Jimmy Carter's stagflation--and they are dying off. Yes, I'm ignoring Nixon's price controls. But we're not as susceptible to oil shocks right now, and even the old guys are aware of that. Ok, the wingers will still rant on about it just to own the libs...

      1. Steve_OH

        But it will only really affect those who live through Jimmy Carter's stagflation--and they are dying off.

        Hey! That's me you're talking about, pal.

  2. Larry Jones

    Fed Chair Jerome Powell said on CBS-TV yesterday that he expects 6% growth over the coming year or two, with no appreciable inflation.* I wonder if WSJ talked to him about their prediction.

    * Not exact quotes - just my takeaway. I was distracted, but he was painting a pretty rosy picture.

  3. KenSchulz

    Worse, every time prices go up on some narrow category of goods or services, there will be a raft of headlines asking whether this ‘signals an inflationary trend’ or similar nonsense. Funny how gas prices dropped last year, but there wasn’t any fearing it was a harbinger of deflation.

  4. Krowe

    People are already starting to blame Biden for rising gas prices. And I expect they will continue to rise, and he'll get more blame, and people will fail to realize this is actually a good thing - because it will represent increased demand as Covid is defeated.
    If we're lucky, that is.

  5. jte21

    It doesn't matter. There's a whole industry now based on selling people gold and Bitcoin on the premise that inflation is set to spiral out of control "any day now" due to the deficit, the Fed, alien invasions, or whatever. Who was it who said that "you can't get someone to understand something, if their salary depends on their not understanding it..."?

  6. skeptonomist

    Prices decreased from February 2020 and hit a low point in April-May last year. They have come back up since - that's a real increase in inflation rate, both from the rate before 2020 and the rate in early 2020 (deflation). That increase may or may not continue - probably not. But there is not necessarily some equilibrium level of inflation to which the economy always returns. The continuation beyond this month in Kevin's diagram is just his opinion. Like other measures, inflation goes up and down. These variations are real, but obviously you can't predict the future from a couple of months trend.

    The year/year inflation numbers can be misleading if there is a one-time fairly permanent change in prices. For example a few years ago Japan increased the sales tax, so the year/year inflation rate went up for a year, then dropped. A similar thing can happen if oil price suddenly goes up or down - there can be a one-year blip in the year/year inflation rate.

  7. skeptonomist

    There is potential for some real inflation because of the huge amount of money pumped into people's pockets by the various rescue/stimulus acts. How much of this will remain after people pay up back rent, etc. remains to be seen. That has nothing to do with the math of inflation calculation. But if the infrastructure bill does not pass, this influence will probably expire fairly soon if things actually open up. The underlying economic situation has not changed - in particular there is no upward pressure on wages, and if the mass of consumers don't earn more they will not be forcing prices up. This assume that there are no oil or other price shocks, which was what was mostly responsible for the inflation of the 70's.

    1. KenSchulz

      Agree that there is no ‘natural’ rate of inflation; just as ‘NAIRU’ turned out not to be a thing. In reality, it is only inflationary spirals that are to be avoided, that is, conditions involving positive feedback that continually drive prices up at an accelerating rate. Historically, that was a wage-price spiral — faced with rising prices, workers demand higher pay, and since labor is a factor of essentially all production, prices had to rise to cover labor cost, and there you are. Workers just don’t have that power anymore, and energy (another universal factor of production) has more diverse sources now than in the years of oil shocks.

  8. rick_jones

    Off to the side of all this I’m still curious to learn how much federal debt is at what interest rate presently.

    1. KenSchulz

      IANACPA, but what would you expect that to tell us? I think you would need to know maturities as well. There must be models around, though the unknowns (future budget deficits/surpluses, GDP growth rates, private borrowing trends) are huge. Aren’t all Treasuries zero-coupon? So rates change only for the fraction of debt that rolls over in a given period. Even a sudden steep increase in the going rate would take years to work its way through the debt burden, wouldn’t it?

  9. pjcamp1905

    "There's not much to do about this except to ignore the inflation numbers for the next few months. "

    Yeah. Good luck with that.

    I expect a month of extremely loud screams blaming it all on Biden's stimulus. Which, of course, has barely left the Treasury.

  10. Pingback: Official Inflation Grew 2.6% in March. Real Inflation Was More Like 2.1% – Kevin Drum

  11. illilillili

    > the various forecast metrics suggest that inflationary expectations are still restrained

    In our capitalist country, there's only one metric that really matters. What's the yield on U.S. Treasuries?

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