Yesterday’s inflation data show that consumer prices surged in April, growing at a 4.2 percent annual rate — faster than they have grown in well over a decade.
Inflation skeptics were quick to point out that the surge was driven by factors that are unlikely to persist over time, such as a 21-percent increase in the price of used cars (likely due to a shortage of computer chips needed to make new cars) and the fact that inflation in April of last year was relatively low, artificially boosting price growth last month by comparison.
The skeptics are right that these factors were key, and that they won’t persist over time. But I argue in my latest Bloomberg column that they are wrong to conclude from that that yesterday’s inflation data don’t increase the chances that the U.S. enters into a period of sustained inflation:
Any period of sustained inflation is likely to begin with aberrant economic phenomena. The pattern takes months to emerge. In April, a fluke in the semiconductor supply chain sent the price of used cars soaring. Maybe this will return to normal in May, but then a transportation problem could suddenly push up the price of meats and eggs. Imagine that June brings them back to earth, only to see the cost of children’s clothes going through the roof. July and August each have rapid price growth, as well, for their own quirky reasons.
Inflation skeptics seem to think that explaining the quirks dismisses the problem. It doesn’t. The relevant issue isn’t whether one-off factors explain any one month’s data. Instead, the question is whether the accumulated effect of several months of price spikes — each driven by unique factors — leads consumers, workers and businesses to change their expectations about the pace of future price increases.
Is this happening? It’s too early to say. But the trend in market expectations about future inflation is rising. It would be troubling if that continues.
Investors' expectations about shorter- and longer-term inflation are rising. pic.twitter.com/AoSwlr1CvJ
— Michael R. Strain (@MichaelRStrain) May 12, 2021