Thursday, May 6, 2021

How to not be fooled by the new inflation numbers

We may be on the verge of a golden age for the nonsense of inflation. If yes, its start date can be on Tuesday morning, when New data on consumer prices was issued.

The possibility of misunderstanding emanates from multiple forces crashing against each other simultaneously. There is sure to be a shortage of some goods and services as the economy moves back to life, which can increase the scattered value for plane tickets or hotel rooms, or as some computer chips have recently done.

There are legitimate concerns that trillions of dollars of government stimulus may push the dollar economy beyond its limits and generate greater broad-based warming.

But to be a savvy consumer of economic data, it is important to separate those potential forces from the inflation data that are coming up just now, which tells us more about the past than the future. Do not take backward information as evidence in the new report that is making those inflation warnings come true.

The 12-month growth in the Consumer Price Index in March was 2.6 percent. Which on its face is a high rate of inflation. (This said, it was over a period of several 12-months ending in mid-2018).

But March 2020 was not a normal month. This was a period in which the coronovirus epidemic caused huge amounts of the economy to come to a halt almost overnight. It would be difficult for that kind of experience not to create distortions in economic data that make things harder to cross. The term for this is the “base effect”, which can show misleading results in year-to-year numbers, when something strange happened a few years ago.

To get a better understanding of the correct inflation trends, it helps to see a percentage change in prices from February 2020, adjusted to reflect the annual rate rather than the 13-month rate. Using that measure, we see a much more granular picture.

Overall consumer price inflation is running at 2.2 percent using this measure – very close to the 2 percent targeted by the Federal Reserve, especially given that the CPI is a few percent higher than the inflation index preferred by the Fed.

In daring new numbers, we see how recovery is creating different inflation dynamics in different parts of the economy.

For example, gasoline prices have increased 12.3 percent year-over-year since February 2020 – perhaps not as drastic as the 22.5 percent year-over-year increase reported in March, but still enough to suggest that Is that people unhappy with prices at the pump have something to complain about other than the base effect.

In particular, in the early months of the epidemic, energy demand collapsed and drillers from oil and natural gas returned to exploration accordingly (remember Strange episode When did the price of crude oil futures go negative last April?).

Demand for gasoline, jet fuel, and other petroleum products is finally on the rise, but energy producers can’t flip a switch and produce enough fuel to meet that demand, and their losses undoubtedly last spring Are scared

Likewise, grocery prices are up significantly: an increase of 3.8 percent year-over-year since February 2020, while meat, poultry, fish, and eggs increased by 5.9 percent. If it seems that protein is more expensive than it was before the epidemic, then you are not imagining it.

Central bankers look at past swings in energy and food prices, with the trend of these prices fluctuating in ways that do not reflect inflation in the economy. But some elements of “core” inflation are showing strange inflation dynamics even when corrected for base effects.

Used cars and trucks, for example, are 11 percent annualized since February 2020, most likely reflecting the many people who found a way to get around in addition to public transport.

The flip side: Airfare is still far below its pre-low levels, adjusted 23.9 percent since February 2020. Airplanes are expected to be crowded this summer. Vacation Routes, As a newly vaccinated population looks to spread its wings. But prices still have not caught up to their predetermined ideal.

Oh, with apparel prices dropping by 2.7 percent since February 2020, and clothing is still cheaper than prependemic levels.

The sharp change in these areas shows the importance of looking at the economic data more deeply than usual in the months ahead. Many of the areas with the most extreme price impact from a downward epidemic in April or May, not March – the year-over-year number of distortions will increase even more over the next few months.

But beyond this, many parts of the economy are undergoing drastic changes, headline numbers on inflation or something else will be lower than normal in the coming months. Rather it is better to break things down by sector to understand whether the dynamics reflect a one-time reset of the economy or something bigger.

The Biden administration and the Federal Reserve are betting on a one-time reset in 2022 with a temporary price spike with a continuation of both inflation and growth. If something more dangerous comes up, it won’t show up as some weird data points. In 2021, but as a broad-based increase in prices in the economy that becomes a cycle of rising prices.

To understand an economy in any sector, details matter more than headlines.

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