INFLATION: Transitory or Troubling Trend?

By at 13 April, 2021, 10:40 am



According to the latest U.S. Bureau of Labor Statistics report, the Consumer Price Index jumped by 0.6 percent in March. It was the largest monthly increase since June 2009.  And that leap up came after things were running relatively hot in February (+0.4 percent) and in January (+0.3 percent.)  Over the past year, CPI inflation moved up to 2.6 percent.

Indeed, inflation has been quite volatile over the past year, with the general price level falling dramatically in March, April and May of 2020, and then jumping higher in June, July, and August. We then settled back into four months of CPI inflation being rather tame.

Source: Federal Reserve Bank of St. Louis, FRED

The big question is the same as what was asked during the CPI spike in June, July and August of last year:  Is this transitory or a troubling trend?

There’s really no way, at this point, of confidently answering that question either way.  The Fed seems to be content to think that this is transitory.  After all, the Fed has been running loose money without historic precedent since the late summer of 2008 (see Monetary Base chart below), and inflation has not taken off.  Oddly, such a position is a de facto admission that Fed monetary policy matters little in the end.  Prices and the market will do what prices and the market will do.

Source: Federal Reserve Bank of St. Louis, FRED

For those who still see monetary policy as having some effect, then there is more – perhaps much more – to be concerned about, given the recent rise in CPI inflation, coupled with volatility over the past year.  High inflation usually comes with increased volatility as well.

Transitory or a troubling trend? It’s a serious question, and if the answer turns out to be a troubling trend, then the economic costs will be severe – as is always the case when inflation takes hold.

Given that there is at least some possibility of this being a troubling trend, it would be far more reassuring if the Fed exhibited some concern, and reined in, at least somewhat, the wildly loose monetary policy it’s been running for almost 13 years now.  But there’s no indication (again, see the above chart) that such prudence is in the mix right now.

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



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