Inflation Chatter vs. the Data and Trends

By at 10 February, 2021, 6:53 pm

by Raymond J. Keating-

Tune in to assorted talking heads on the economy via cable TV or online, and there’s been a resurgence in chatter about the possibility of inflation. The latest Consumer Price Index (CPI) report from the U.S. Bureau of Labor Statistics serves up data that either side of the inflation debate can probably point to for support.

CPI inflation ticked up from 0.2 percent in December to 0.3 percent January. Of course, if inflation were to persist at or around that monthly rate, it certainly would be cause for concern, as we would be staring at inflation topping 3.5 percent for the year.

However, during the previous four months, inflation was rather calm, increasing by 0.2 percent in three of those months and by 0.1 percent in the other month. If annualized, that’s an annual inflation rate of 2.1 percent – quite reasonable.

Of course, all of this followed on the tumultuous movements in prices when the pandemic hit – with three months of CPI declining (including two big monthly drops) and then three months of prices snapping back by significant percentages. (See the following chart.)

Source: Federal Reserve Bank of St. Louis, FRED

So, what are we supposed to take from this data looking back? Not much, quite frankly. Big downs and ups were due to the pandemic, with subsequent calming in inflation.

Should we be concerned about the January uptick?

Is the 0.3 percent move up in January something to be worried about? At this point, one month’s data does not make a trend. It certainly warrants watching, but no one should be surprised if CPI inflation moves back down in February. To the extent that any trend develops, it will be hard to disentangle it from the pandemic and immediate post-pandemic moves in the economy.

Questions for the long term

Over the longer haul, the questions on inflation will come back to same queries being asked since the summer of 2008 when the Fed kicked monetary policy into hyper-speed, expanding the monetary base, for example, in a previously unimaginable way. That policy has continued for more than a dozen years now, and actually has accelerated recently. What will be the fallout – if any?

Other than a short term blip here and there, inflation has remained calm during this era of unprecedented loose money, as bank reserves have simply risen dramatically along with the monetary base. Will that pattern continue – whereby the private sector seems to, in effect, be keeping in check the policy ills of the Federal Reserve – or will inflation eventually kick in?

That’s a good question for which I, and I don’t think anyone else, has a reliable answer. That reality, in and of itself, creates uncertainty in the economy. And if the answer eventually turns out to be that inflation will be unleashed, the potential economic ills down the road could be significant. And that’s why we continue to keep an eye on inflation and the Fed.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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