Inflation in the USA hits a High Note

Prices are rising at their fastest clip in years, but the Fed is relaxed because expectations aren’t embedded.

By guest author Justin Lahart from the Wall Street Journal

Graphic and caption courtesy by the Wall Street Journal

Inflation might be picking up, but it isn’t like people are singing songs about it.

The Labour Department on Wednesday reported that consumer prices rose 0.6% in April from March, putting them 4.2% above their year-earlier level. Some of that gain on the year was driven by a rise in gasoline prices, but core prices, which exclude food and energy items, rose 0.9% last month and were up 3% from a year earlier. That marked the biggest 12-month rise in core inflation since 1995.

In some respects the pickup in inflation has been both predictable and predicted. Prices dipped in April last year as the Covid-19 crisis shut down much of the country. Now we have come up against the anniversary of those declines. Beyond those so-called base effects, the supply-chain problems brought on by the pandemic have been evident for some time. It wasn’t hard to guess what might happen when the rising demand brought on by a reopening economy met those bottlenecks.

That is why Federal Reserve officials aren’t acting at all alarmed about what is happening with prices. This week several of them have said they expect price gains to pick up this year, but that they don’t believe much of the rise in inflation will persist once the supply-chain snarls have been resolved. The central bank isn’t ready to start reducing its asset purchases yet, much less to think about raising rates.

Part of why is that, eye-popping as some of the price increases over the past year have been, higher inflation hasn’t embedded itself in consumer psyches. Americans under 60 have next to no experience of what it was like when inflation was such a problem that popular musicians were singing about it, like Marvin Gaye did in 1971 (“Inflation no chance/To increase finance”) and again in 1972 (“The nation’s taxation/Is causin’ all, all this inflation”).

That is what it looks like, or rather, sounds like, when inflation expectations have reached the point where they add to upward price pressures. Moreover, it is a process that takes awhile: The inflation problems of the 1970s had their root in price increases that began to take hold in the mid-1960s.

The other thing to recognise is that, while the Fed doesn’t want people singing about inflation, it might like people to start humming about it a bit more. It has long sought to push its preferred measure of inflation (which runs a bit cooler than the Labour Department’s gauge) to consistently average about 2 %, and to get there it needs consumers’ long-term inflation expectations to rise above the very low levels they have been stuck at for years.

Which isn’t to say prices couldn’t rise more than the Fed expects over the next year. The central bank could easily be underestimating how quickly demand will pick up and how persistent supply-chain problems prove to be, for instance. And if that leads Beyoncé or Taylor Swift to start singing about inflation, watch out.

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