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December inflation clocks in at still high 7.1%

Published on 49 Comments on December inflation clocks in at still high 7.149

Today is inflation day. There's no need to be cowardly about this, so let's just dive right in:

The headline inflation number for December was 7.1%, a small increase from last month's 6.9%.

That's measuring prices compared to a year ago. However, if you measure inflation over the past month (and then multiply by 12, approximately, to calculate an annual rate) you get an inflation rate of 5.6%, down considerably from its peak a couple of months ago.

You can interpret this in multiple ways:

  • Republican spin: Eek! Inflation is even higher than last month! We're doomed!
  • Democratic spin: Inflation is high, but it's peaking. And the monthly number shows that the inflationary impulse is declining, which should show up in the headline number fairly soon.

These are both true. My own view, for what it's worth, is that (a) high inflation has been more persistent than I would have guessed, but (b) inflationary pressure really is declining. "Transitory," it turns out, is longer than most of us figured.

My own fairly mild view of inflation is driven largely by looking at personal savings:

We pumped a huge amount of money into the economy over the past two years, and what happened is that people saved a large part of it and then spent it down over time. However, it's all gone now: personal savings by the end of 2021 was fully back to its long-term trend level of about $1 trillion.

With that monetary impulse gone, I expect demand to settle down as well, with inflation following suit a little later. We shall see.

49 thoughts on “December inflation clocks in at still high 7.1%”

  1. Brett

    I just hope that Omicron outbreak in China doesn't screw up the supply side of resolving inflation. More chaos in the supply chain.

    1. MontyTheClipArtMongoose

      "Yo dawg, I heard you like lableaks, so we put lableaks in your lableaks so you can disrupt western colonizer endstage kapitalism when you're on a ventilator".

  2. Solarpup

    And again, the important question that barely gets talked about is how much lower could you have gotten inflation without tanking the economy during a once in a century pandemic crisis. Entirely aside from the supply chain issues, what was the trade off for lower stimulus in terms of long term growth potential later vs. inflation now.

    There's been a few Paul Krugman columns on this. Chris Hayes kind of gets there sideways on the most recent Ezra Klein podcast. Everyone else seems to be ceding the Republican talking points of stimulus == inflation == bad.

    2. middleoftheroaddem

      The challenge, the US has much higher inflation than the rest of the OECD (Europe and Japan). Unless your point is the rest of the 'advanced' world is about to suffer from long term underdevelopment due to a lack of stimulus, then you might have to accept the US has made policy decisions that are creating unnecessary inflation.

      1. Jerry O'Brien

        None of that is clearly true. Inflation in Germany has run 5.8% over last year, and in the U.K. it was up 4.6%. I wouldn't call 7% "much higher" than those numbers. And could those nations have poorer growth prospects than the United States because of their policy choices? Yes, they could!

        Who's convinced that the United States is suffering policy-induced excessive inflation? Lawrence Summers? Paul Krugman? Maybe not everybody yet.

          1. Ken Rhodes

            Middle, you wrote "US has much higher inflation than the rest of the OECD..."

            Now you've backed down to "US inflation is higher than the OECD."

            That second version is more realistic, and also less alarming.

      2. jdubs

        Inflation in Europe has actually been pretty similar to that in the US, albeit about 2 months behind the US. Inflation in Europe fell dramatically in spring 2020 about 2 months behind the US, and has risen at a similar rate in 2021....again about 2 months behind the US.

        I assume that autos make up a smaller portion of the basket of goods in Europe, but thats just a guess.

  3. SecondLook

    Amusing how homeowners complain about inflation, except when it comes to the increase in the value of their houses.
    But of course, the cost of housing rising more rapidly than incomes isn't inflation...

    2. Atticus

      Increased property taxes and insurance can be very burdensome. It's nice to have your property value increases as long as you can afford the associated expenses. I'm paying about $5k more per year then I was a few years ago.

      1. SecondLook

        If you are talking about related costs of ownership I wouldn't disagree about the effect of inflation on immediate costs - although those costs are highly variable within the United States. For example: Louisiana has a median property tax of only .18% - granted offset by high property insurance rates.
        Now Maine has the lowest insurance costs by a significant margin.

        Unlike most inflation in goods and services which tend to be similar in urban areas (rural rates, the 20% of us that actually live outside the cities, is a bit different), cost of ownership is a variable.

        And regardless of increased costs, when you look at how much your net worth increased, the price is quite worth it. Yes?

  4. kahner

    "high inflation has been more persistent than I would have guessed"

    Well, the pandemic has gone on longer than most guessed.

    1. spatrick

      Bingo. It is the result of the pandemic and not much can be done about it short of the Fed raising rates gradually but this is a hell of a lot better than 17 percent (and more than likely a lot higher) unemployment

  5. Gilgit

    Oh, basically the same headline number as last month. I saw a couple of posts where they didn’t say the number and I thought it was going to be massive. I’m surprised Kevin didn’t post the 2 year average inflation number. I’d be curious what that is.

    I know Kevin keeps harping on the stimulus and savings, but I still think that is a minor player. As many have noted, including Kevin I think, the amount of sales is only where it would have been without the pandemic. I think this is entirely about the pandemic causing people to spend less on services and buying goods instead. Which means there is a limited amount that changing public policy will do to bring it down. Got to wait for the Spring and a break in Covid.

    I have heard a bit more about the rise in meat prices. I thought it would be because of complicated reasons. But apparently, it’s just because the handful of companies that control meat packing jacked up the price to make big profits. I hope Biden and Co. make them pay.

  6. middleoftheroaddem

    A few points:

    1. The US has much higher inflation that Europe or Japan. So clearly its not just the global supply chain.

    2. Some elements of inflation is likely being baked in for the medium term. Items such as rent, shipping costs, labor wages are either sticky (wages) or commitments over a time horizon (rent).

    3. Inflation has an oversized political impact. Even if unemployment were very high (clearly it is not - just giving a theoretical example), still say 90% of job searchers would have a job. In contrast, inflation impacts every American and the prices are very visible.

      1. Jasper_in_Boston

        I would guess the US does significantly more importing from china for example that many other OECD countries.

        It's possible, but I don't think particularly likely.* I know the EU, for instance, is now (and for a number of years has been) a larger market for China than the US. Also, the US is probably near the bottom (if not at *the* bottom) among OECD countries when you look at imports as a percentage of GDP. Foreign trade in general accounts for a smaller share of the economy the larger that economy is.

        *(In absolute terms, of course, the US does import more from China than any other OECD country; its economy, after all, is four times larger than the next largest OECD member. But in terms of impact on inflation what matter isn't absolute numbers but percentages.)

        1. Ken Rhodes

          Middle, you did it again! You wrote "The US has much higher inflation than Europe..."

          Now you've backed down to "US inflation is higher than the OECD."

          That second version is more realistic, and also less alarming.

        2. jdubs

          So now we agree...
          Europe, the US and much of the world is seeing higher than normal inflation. The rate of inflation appears similar across many different parts of the world. While the monthly rate of change rarely matches across countries, the changes and timelines bear a striking resemblance.

          This argument now accounts for actual data....and certainly reads very differently.

          1. middleoftheroaddem

            My point is the DIFFERENCE between US and European (or OECD) inflation is significant: this difference is not caused by global supply chain issues and, more likely, a function of US domestic issues and policies.

    3. golack

      ....only specific inflation has an outsized political impact.
      Gasoline above $4/gal--rage. When it drops below $2/gal, crickets.
      Milk, meat, new cars, etc.---all cost more, and those price increases will probably stick for a while. Major price increases will wane, but you can pick most anything, pick 2019 (or 2020) for comparison, and yell "inflation". Look--that price is up 10%!!! OUTRAGEOUS!!! That's how you make a 3% rate over three years sound apocalyptic.

    4. ScentOfViolets

      Cites for your first point, please. More than one, and with links. But also for points 2. and 3., since they appear to be just your unsourced opinion with no chain of reasoning to back them up.

        1. JonF311

          I can't tell quite what you're saying, but inflation is an increase in prices, not prices higher than one would like them to be. If gasoline prices hit $5/gal and then stayed there indefinitely with no more increase people would complain mightily-- but the inflation rate of gasoline would have fallen to %0.

          1. middleoftheroaddem

            My point on inflation is non food and energy items (I mentioned wages, shipping cost and rent) tend to be sticky: once they go up their price is less likely to rapidly decline.

          2. SecondLook

            Exactly so.
            Inflation is a value-free increase in costs.
            And, it is only really damaging if that increase isn't offset by a rise in income.
            Hmm, I wonder what percentage of Americans have cost of living adjustments built into their income - outside of the retired and all government and unionized workers.

  7. NealB

    My theory is that because inflation has been so low for the past two decades, the market is finally trying to catch up all over the place, including and perhaps especially by means of corporate price-gouging to increase profits. No one really thinks it'll last, since no one (except the price-gouging corporations) expect to take much profit from the inflation much longer. Price-gouging corporations will have to settle down soon enough when their high prices no longer hold up to lower demand. Okay, so a pound of burger meat costs 50¢ a pound more than a year ago; just wait 'til it goes on sale and stock up then.

    2. middleoftheroaddem

      NealB - why under capitalism would not these "Price-gouging corporations " not previous, and in the future, charged these unfair prices. Corporations generally price to maximize profits: how is that different now?

      1. Spadesofgrey

        So they can hold up sales. See 90's, late. The problem is it undermines real profits. This was happening again in 2019.

      2. Jerry O'Brien

        This is a good question. I would think capitalists are more rational than to suddenly feel a need to break free from these recent decades of very stable prices. Haven't they been highly profitable decades?

    3. ScentOfViolets

      Whenever this particular inflation-related topic comes up, I like to trot out this quote:

      secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not pursue fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational."

      That's from Steve Randy Waldman's blog Interfluidity, if you want to track down the post it's pulled from. I highly recommend that people do so, as well as the related posts on that site and the commentary following each one.

  8. rick_jones

    It would be good if the inflation and savings charts had the same x-axis or even were to appear on the same chart.

    As for the spin variants, it would seem one might have perceived it having peaked/ended last Summer too given the shape of the month over month line.

  9. azumbrunn

    I'd like to see inflation measured leaving aside the prices fir cars. I bet they would look quite a bit less dramatic.

    1. Ken Rhodes

      The craziest thing about that is the relative inflation of new car vs. used car prices. New cars go up at an unremarkable rate, but because there is a supply-driven shortage of new cars, used car prices go through the roof.

      BTW, I think that might be true in home prices as well, though I'm not at all sure of that.

      1. rational thought

        I assume by " craziest thing " you mean that makes zero sense as you expressed it and it really doesn't make sense.

        A supply constraint on product x should cause a relative price increase for product x vs product y , not the reverse.

        What I expect is really happened is that the reduction in new car supply is balanced by a reduction in new car demand. Many who otherwise might have traded in for a new car might be disinclined to go shopping for a new car during a pandemic with the related human contact and just decided to live with their current car for a while, especially if driving less.

        And the supply of used cars is directly related to the demand for new cars. Fewer people trading in for new cars - fewer used cars added to supply.

        So the lower supply of new cars ends up filtering down to a lower supply of used cars, which is not balanced by lower demand.

  10. illilillili

    I liked it when you were comparing the current CPI to the pre-covid CPI. In January of '21, prices were still artificially low, making current prices seem artificially relatively high.

    Meanwhile, a 9-month spike in prices still seems pretty temporary to me.

  11. Justin

    It’s silly to over analyze this. I don’t even notice any of these price changes. The media and political class have to fight about something and so this is the trivial thing we have to debate now. Don’t take the bait.

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