Inflation: Is an ancient specter returning?

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"Inflation is here," said Neil Irwin at The New York Times. The question is how long it will stay. The Consumer Price Index in April made its "steepest year-over-year jump in 13 years," putting data behind the warnings that many economists and businesses have been issuing for weeks. "What is unusual about this moment is that prices for so many things are rising at once, albeit for different reasons." Some costs, such as airfare, are simply returning to pre-pandemic levels. In other cases, the causes of price increases — for instance, the spike in East Coast oil prices set off by a cyberattack — "are truly random events." And supply shortages in everything from lumber to semiconductor chips could just be a symptom of "an economy rebooting itself." But inflation watchers are on high alert, fretting that all these factors (and more) could unleash "price dynamics unseen since the early 1980s."

"Inflation hawks" said the same thing in 2011, said Paul Krugman, also at The New York Times. A similar surge in consumer prices caused mainly by rising oil prices arrived as the world recovered from the 2008 financial crisis. But the Federal Reserve rightly stayed "focused on 'core' inflation, a measure that excludes volatile food and energy prices." This time, core inflation is temporarily up, but if you correct for the effects of "simply getting back to normal," the data looks much tamer. Five categories — used cars, rental cars, airfare, and lodging and food away from home — contributed nearly 60 percent of the increase in prices, said Eric Levitz at New York magazine. These are "artifacts of the pandemic economy" and the rush by vaccinated Americans to get out of their houses. Hotels and flights are packed again, but car lots have been further emptied by a global shortage in semiconductors. "This is not what durable, economy-wide inflation is made of."

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Yet it is exactly how a wage-price spiral can begin, said Connel Fullenkamp at Newsweek. The stagflation of the 1970s "also featured 'temporary' supply shocks — at the time, to energy and food — and easy monetary policy." The clearest sign of an impending crisis is that "businesses have lost all fear of raising prices." They are justifying it "by saying that customers can afford it and everyone else is doing it, too." This creates a dangerous self-perpetuating cycle. Indeed, the Fed may have to raise interest rates "much higher than investors anticipate," said former New York Fed president Bill Dudley at Bloomberg​. Markets are expecting short-term rates to stay below 2 percent. But if inflation runs higher than its target, "one could imagine a federal funds rate of 4.5 percent."

There is both risk and opportunity for President Biden, said Matthew Yglesias, also at Bloomberg. "Rising prices for food and energy may not matter to economists, but they do to consumers." Biden can "let Powell stay focused on the long-term health of the labor market." But the White House should look at "unwinding the Trump-era U.S.-European tariff war on food products," and at expanding visa programs to stem the shortage in agricultural labor. Prices at the supermarket "matter to people's lives and to politicians' futures."

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