Is the Spurt In Inflation Here To Stay?

…Is the spurt of inflation the last few months likely to be sustained, or to fade?

Below is a figure showing two prominent measures of inflation:

  1. the Consumer Price Index and
  2. the Personal Consumption Expenditures Index…
[which], for practical purposes, move together fairly closely over time. On the far right, you can see the recent jump of inflation up to an annual rate of about 5%.

…[The above chart] shows six previous periods in which CPI inflation topped 5%: 1946–48, 1950–51, 1969–71, 1973–82, 1991, and 2008.  For the current episode, which parallel is most relevant?…

  • According to Cecilia Rouse, Chair of the White House Council of Economic Advisers, along with Jeffery Zhang, and Ernie Tedeschi in a short rumination on the “Historical Parallels to Today’s Inflationary Episode” last week…concluded that the most relevant parallel here is the post-WWII inflation episode (1946-48).
  • While there are many differences they point out that:
    • both the World War II period and the pandemic were times when savings rose substantially, suggesting the possibility of pent-up demand ready to surge into markets and
    • both episodes were also a time when economic dislocations meant that certain goods were not readily available; for example, the pandemic has been accompanied by shortages of durable goods like cars, in part because “manufacturing capabilities were temporarily shut down or reduced to avoid COVID contagion.”

It’s worth noting that in their short essay, Rouse, Zhang, and Tedeschi do not discuss:

  • the large and ongoing rise in federal debt,
  • the role of the Federal Reserve in financing that debt, or
  • the potential for additional inflationary pressures from the existing spending proposals now before Congress…

For looking at market expectations of inflation, you can compare two similar types of debt, one which adjusts for inflation and one which does not. The U.S. Treasury issues:

  • most of its debt in a way that does not adjust for inflation, but it
  • also issues Treasury Inflation Protected Securities (TIPS), which adjust according to changes in the Consumer Price Index.

Another measure of inflation looks at predictions from professional forecasters, which are tabulated in the Livingston Survey carried out by the Federal Reserve Bank of Philadelphia…Below are 2 charts that show expectations of future inflation from these two measures.

The two measures as presented above are not exactly comparable, because the market-based inflation expectations are for five years ahead, while the Livingston survey is for 10 years ahead but, either way…

it looks as if future inflation expectations are in the range of about 2%, which is often taken as a reasonable working definition of “price stability.”

Editor’s Note:  The above version of the original article by Timothy Taylor, has been edited ([ ]) and abridged (…) for the sake of clarity and brevity to ensure a fast and easy read.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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