There are reasons to believe that inflation will not become a major problem. That everyone who said the economy faced a threat of inflation over the past twelve years was ultimately wrong is not among them.
In its May personal income and expenditure report on Friday, the Commerce Department said its measure of consumer prices rose 0.4% last month from April, placing them 3.9% above their level of the previous year. Prices excluding food and energy – the core economists watch to better understand the inflation trend – rose 0.5% from April and 3.4% from a year earlier.
The Commerce Department’s inflation figures are preferred by the Federal Reserve, but even though annual increases in overall and base prices are now well above the Fed’s 2% inflation target, the central bank does not seem particularly worried.
One of the reasons is that, since prices fell when the Covid-19 crisis hit in the spring of last year, year-over-year comparisons are magnified a bit. Compared with May 2019, overall prices and base prices increased by 2.2% per year. Another is that supply chain bottlenecks are driving some prices up in ways that shouldn’t persist. Data on Friday showed used car prices up 38% in May from a year earlier, for example, while car rental prices were up 115%. It is more than exaggerated to think that these prices will continue to climb like this over the next year or so.
Yet even if Fed policymakers expect inflation to drop to around 2% next year, it may well stay elevated for a while. Supply chain problems can persist to the point that higher prices are reflected in consumer inflation expectations, for example. In their struggle to find workers, employers may also have to raise wages to the point that prices rise.
Given that the Fed and most private forecasters have usually overestimated how much consumer prices would rise, and given the regular appearance of false prophets who predicted dangerously high inflation to be wrong again and again, it’s easy. to laugh at worries about inflation. now.
However, it is important to recognize how the circumstances are different from those that prevailed in the years following the last recession. The pandemic has caused not only bottlenecks in the supply chain, but also changes in consumer preferences and possibly an increase in the bargaining power of workers. Therefore, the rules regarding the price direction may not be the same.
Inflation may not be a problem a year from now, but inflationists’ supernatural habit of being wrong will not be the reason.
Write to Justin Lahart at [email protected]
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