by Calculated Risk on 8/01/2021 04:22:00 PM
I haven’t commented much on inflation because I do not consider inflation a serious economic problem.
First, transitory doesn’t mean that price increases won’t “stick”. It means that year-over-year (YoY) inflation will decline back to the Fed’s target of 2%.
The first graph shows the PCE price index since January 2020 (before the pandemic), and the dashed blue line is the Fed’s target of 2%.
As I’ve mentioned before, there was some deflation at the beginning of the pandemic, and this has increased the YoY change (base effect). There is some transitory inflation from supply chain issues, and surging rents will probably push up Owners Equivalent Rent (OER) over the next year.
This shows that inflation has been below target for years. If we were doing price targeting (we aren’t) we would be looking for more price increases.
The graphs for core PCE inflation show the same pattern.
The question is not will some prices “stick”, but rather will YoY inflation ease back towards the Fed’s target? Or will inflation stay at the current 4.0% (PCE YoY in June)?
My sense is inflation will ease back towards the Fed’s target.