Inflation’s A-Comin’, But This Isn’t A 1970s Redux
In recent months, the topic of broad-based price increases for goods and services, otherwise known as inflation, has divided political opinion and piqued the interest of many of those following the conversation in the media. Some prominent economists argue that the U.S. government’s unprecedented fiscal stimulus risks overheating the economy and sparking inflation. Others, including powerful policymakers atop the Federal Reserve and Treasury Department, expect inflation to spike at various points this year, but argue these increases will be transitory – in part the result of so-called “base effects” that reflect year-over-year growth from unusually weak price data when the economy ground to a halt in the initial wave of COVID-19.
The most common measure of inflation, the Bureau of Labor Statistics’ Consumer Price Index for All Urban Consumers, posted a 2.6 percent increase year-over-year in March. Gasoline prices were among the most significant constituents pulling this index upward, increasing by 22.5 percent. However, as Neil Irwin explains in The Upshot, some of this increase is indeed due to base effects, but some is attributable to unbalanced supply and demand for oil products. Grocery prices are also increasing, but the index also includes constituent prices that have fallen over the last 12 months, most notably airfare, tickets to sporting events, and hotel rates. As the vaccinated share of the population rises and travel increases, these prices surely will rise as well, but how durable should we expect these changes to be?
As they always do, opinions vary. most of the managers we cover tend to align with the Fed’s view that inflation is likely to be volatile this year, yet mostly tame for the foreseeable future. Shortages of shipping containers, microchips, and restaurant workers will likely combine with base effects to produce unusual top-line inflation figures in the coming months as demand increases and weak data points roll off. But, policymakers have clearly indicated that they plan to look through these blips after years of sub-target price increases.
While booming growth and the plans of an ambitious Biden administration present some risk of higher and more sustained inflation, the dominant view at present is that we are not in serious danger of 1970s-style runaway price increases.
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