March 28, 2024

Is Inflation About to Rise? That’s the Wrong Question

If, for example, the overall Consumer Price Index rises through May at a rate consistent with 2 percent annual inflation, it will show a 3.2 percent year-over-year rise from the depressed May 2020 level. That would be the highest level since 2011 — but would also be misleading, a result of “base effects” rather than the true longer-term trajectory of prices.

For quite a few individual products and services, those numbers will look even more extreme. The price of home natural gas service is on track to be up 5.4 percent, with airline fares up 16.3 percent, and the price of women’s dresses up a remarkable 17.9 percent — all reflecting the deep discounting retailers were forced to do in the spring of 2020.

Those numbers might amount to inflation in a technical sense, but only because of the conventions around using year-over-year data. Dress prices in that model might look as if they are evidence of price inflation, but they would still be 9 percent below pre-pandemic levels.

These calendar effects don’t matter in any meaningful way, and Fed officials have said as much. (“Inflation may temporarily rise to or above 2 percent on a 12-month basis in a few months when the low March and April price readings fall out of the 12-month calculation,” said Lael Brainard, a Fed governor, this week, “But it will be important to see sustained improvement to meet our inflation goal.”)

The most important thing to remember about the yo-yo effect on prices: Beware of anyone who might seek to use these numbers to create misleading narratives about the level of inflation in the economy.

Suppose you get a vaccine jab and suddenly feel more comfortable going out to eat, or attending a concert, or taking a long-postponed vacation. Like a bear that has been hibernating through the winter, you will be ravenous for the pleasures long denied.

But if most everyone emerges from hibernation at once? There are only so many restaurant reservations, concert tickets and hotel rooms available; their supply is pretty much fixed in the short run. If anything, the supply is likely to be below pre-pandemic levels because of permanent business failures.

Article source: https://www.nytimes.com/2021/01/16/upshot/inflation-rise.html

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