“Some say the world will end in fire, some say in ice.” Robert Frost wasn’t writing about the inflation debate, but he might as well have.
A hint of fire is what we are seeing now. The Labor Department on Tuesday reported that consumer prices rose 0.9% in June from May. That put them 5.4% above their level a year earlier, marking the biggest on-the-year gain since June 2008. Core prices, which exclude food and energy to better reflect inflation’s trend, were up 4.5% from a year earlier, for the biggest gain since November 1991.
The big question now is to what degree those price increases are transitory. Comparisons with a year ago are still a bit messy, after all, since prices softened in the early stages of the Covid-19 crisis, while some of the factors pushing inflation higher seem unlikely to have much staying power. Used-car prices, for example, were up 45% from a year earlier—a result of the supply-chain issues that have limited the availability of new cars even as demand for vehicles has continued to grow.
Indeed, at least for now it looks as if inflation from a year ago may have reached its peak. The easy year-over-year comparisons are about to end, prices for many commodities have stopped rising on a monthly basis, and wholesale used-car prices have turned lower, economists at BofA Global Research point out.
That doesn’t mean the all-clear signal on inflation has been sounded. A swiftly growing economy, tightening job market and continuing supply-chain issues seem a ripe environment for prices to keep rising. There is evidence that consumers’ inflation expectations have shifted higher, which in itself makes for a more inflationary environment. Finally, the pandemic has brought about shifts in spending patterns that could continue to put upward pressure on prices.
As a result, a return to the pre-pandemic environment, in which the Federal Reserve’s preferred measure of inflation (which runs a bit cooler than the Labor Department measure) consistently fell short of the central bank’s 2% target, may not be in the offing. But neither is a prolonged period of dangerously high inflation a necessary outcome.
Rather, investors should be at least open to the possibility that what is coming may be neither fire nor ice, but an environment where inflation is merely warmer than we have become accustomed to. That could be different enough—in the 25 years preceding the pandemic, the Fed’s preferred measure of core inflation was below 2% in three out of four months. And for the Fed, which would like to see inflation run a bit higher than its target for a while, that could suffice.
Write to Justin Lahart at email@example.com
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Appeared in the July 14, 2021, print edition as ‘Inflation Outlook Is Set to Medium-High.’