Public Service Post of the Day

Subject: Econ 101

 

Seems there's no shortage of chatter about inflation on social media platforms nowadays. People are clutching their pearls (and without evidence) suggesting the current guy flipped a switch to bring rampant and runaway inflation back. 

 

It is difficult for me to figure out how you accomplish that in seven short months and what the political gain there is by doing so - but I digress.  I'm going to add my .02 to the chatter.

 

Allow me to explain what we are witnessing.

 

The near-collapse and rapid bounce-back of several corona virus-affected sectors, such as travel, led to what economists call a “base effect”: when the year-over-year price increases are sharp, but only because they’re coming back up from a low point caused by an economic shock. 

 

Think: V-Shaped Recovery

 

When people stopped traveling altogether (like they did a year ago) prices fell sharply for things like gasoline, used vehicles, airfares, and auto rentals. As a consequence, any increase now — even a return to normal pre-covid prices — has an outsize impact on the appearance of inflation year-over-year. 

 

This is the main problem of using only short-term year over year comparisons. The categories that dropped dramatically when covid hit may have returned to levels from pre-covid but show up as large increases which paints a false picture and supports those who infer inflation is out of control. 

 

It feeds their confirmation bias.

 

The Labor Department estimates costs have risen 5 percent over the past year. Recent increases don’t come even close to what I remember in the 1970s. Back then prices rose an average of 7 percent every year for more than a decade. That stretch of inflation was driven by energy, with sudden plunges in oil imports raising fuel prices and inflation expectations.

Price increases were also more broadly spread across the economy in the 70s. Inflation for food, housing, transportation and medical care were all above 5 percent. 

 

This time around, experts say the current spate of inflation is driven by a combination of pent-up demand and supply chain bottlenecks, both exacerbated by the pandemic.

 

If you care to run around with your hair on fire to make a political point, that's fine. It's not happening in economic circles. 

 

Don’t take my word for it – ask your trusted financial advisor.

 

And, you're welcome.