The latest inflation numbers
Economist Justin Wolfers had this analysis today. Oy:
A lot of the pain that people feel reflects forces that are real, but unlikely to persist. So headline inflation is partly driven by a 10.1% rise in food prices (11.9% for “food at home” which is prices at the grocery store), and a whopping 34.6% rise in energy (mostly gas)
But what’s more worrying is persistent inflationary pressure. This report tells a pessimistic story of a broader rise in prices, and the shift in price pressures from goods (which reflects many pandemic-related pressures) to services (where inflation was yet to really emerge).
An ounce of perspective. This report tell us about May. Future inflationary pressure depends on things like wage pressure (which has cooled somewhat), productivity growth (where I can be optimistic), and re-normalization of supply side (where recent news is good, but fragile).
There’s little evidence (yet) that a 1970s style wage-price spiral is underway. There’s reason to be optimistic that many goods prices will actually fall. And while energy prices have risen, once they stop rising, they’ll stop contributing to inflation.
I think Adam summarizes the underlying dynamics — and why they might change — as well as anyone.
Comparisons of the current inflationary moment to the Great Inflation are inapt. The “Great Inflation” ran from 1965 to 1982 and was spurred along by policy. The “covid spike” has so far run from 2021 to mid 2022, is driven by a pandemic, and the Fed has signaled it’ll fight.
Ben’s graph (below) points to the optimistic reading: Core inflation, while high, may actually be trending down. When thinking about the future, that’s the more relevant index. We just wish it were more obviously trending down, and doing so faster.
The really important question about our current inflationary moment is its persistence. Will it last? Will it gain its own momentum?
No monthly number tells us much about this, but each passing month of data adds another reason to worry.
The really difficult thing to remember (from a policy perspective) is that the past really can’t provide much guidance. This is still a pandemic-wracked economy trying to get back on its feet and back to normal. The usual rules of the road don’t really apply.
Truth is, few (if any) economists understand how pandemic-stricken economies really work. We’ve spent our lives studying economies populated by healthy people with smoothly functioning supply sides.
Originally tweeted by Justin Wolfers (@JustinWolfers) on June 10, 2022.