Inflation has been surprisingly high recently, at least according to some measures. The main argument made by those who say you shouldn’t worry is that those measures are only temporarily high and will eventually come down. I made that argument in the past. The purpose of this blog post is to argue that this is no longer a defensible position.
Originally, the rationale for this position was strong: inflation likely would have been temporarily high when the economy was just opening up because the population was just getting vaccinated. Of course, you can’t turn an economy back on without some supply bottlenecks. It was also pointed out that we had temporary deflation for three months when the lockdown started, so a burst of temporary inflation when we reopen was not terribly unlikely or a worrying sign.
These were reasonable arguments to make at the time. Furthermore, the data shows that they were correct. Below is a plot of 2 monthly inflation time series constructed using CPI data.. One time series (Blue) is the headline CPI inflation which is the weighted average change in consumer prices. The other (Blue) is median CPI inflation which records the weighted median change in consumer prices. The headline data is more volatile because, as an average, it is driven by price fluctuations in goods which experience rapid price changes. The median CPI data tends to be more stable and representative of longer-term price trends.
What the plot shows is at the beginning of 2020 we had a temporary deflationary period on average (blue line). This happened concurrently with the shutdown. Later on, in early 2021 we had (past tense) transitorily high inflation on average (blue line again). This happened concurrently with the re-opening. In both cases I’m comfortable calling the shifts in inflation transitory because they ended in under half a year; they were associated with one-time events (a shutdown in one case and a reopening in another); and they were only represented in the weighted average inflation (blue line) but not in the weighted median inflation (red line). Hence, the evidence for transitory inflation is strong.
So in summary, you can’t say inflation is transitory now. It already was transitory.
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