Ben Bakkum in Macro Chronicles:
I wrote last month about how base effects would cause year-over-year inflation numbers in the US to appear to rocket higher, and the headline Consumer Price Index (CPI) print of 4.2% for April certainly got everyone’s attention. Not just base effects, however, drove the year-over-year figure that high, with large jumps in certain components such as used cars making historic contributions to the overall index change. We can easily foresee when the base effects will fall off, but knowing to what extent inflation will return to a lower clip when various transitory factors abate (as the Fed assures us) or if it can maintain a high rate on the back of significant fiscal and monetary stimulus (as certain economists, bitcoin boosters, and financial pundits warn), remains uncertain.
In a super complex system like the economy, forecasting variables such as inflation with precision can be a quixotic undertaking in relatively normal conditions, let alone in the wild circumstances shaped by the pandemic. I tend to fade—based I think on good reason—the calls made with complete conviction that a bout of soaring inflation will soon overtake us, but I think the most intellectually honest view involves acknowledging that inflation could very well stay high for longer than expected. I would argue that no one really knows for sure. I like the title of Emily Stewart’s recent piece at Vox, The Black Box Economy, as a name for the current state of the world that makes it tough to see what comes next.
As an example of why I think inflation will prove particularly unpredictable, a look under the hood of the consumer price index shows a striking increase in the dispersion of its various component indices around the shutdowns last year and the reopenings now. This means that whereas price changes for different things like bread, men’s sweaters, car tires, and veterinary services tended to maintain a fairly consistent distribution pre-pandemic, now the changes in components are veering off from each other in direction and magnitude.