~600 words, ~3 min reading time
On Friday, the latest CPI numbers came out. We’re looking at a 6.8% increase in prices from November 2020 to November 2021, and a 0.8% increase from October 2021 to November 2021 alone. (In annualized terms, that’s nearly 10%.)
By Usonian standards, this is quite high – literally the highest rate we’ve seen in my lifetime. (Last time we saw an inflation rate this high was about 9 months before I was born. Coincidence? Almost certainly!)
As before, this rate is largely reflecting rising gasoline and fuel oil prices and rising prices for vehicles (both new and – even moreso – used). However, core inflation (which excludes energy and food, since those prices tend to be very volatile) is up 4.9%, which is a bit disturbing.
Also a bit disturbing is that the U of Michigan survey is showing inflation expectations of about 5% over the next 12 months. The 5 year TIPS breakeven inflation rate shows an expectation of averaging about 3% inflation over the next 5 years – about 0.5% higher than a month ago. Now, the Fed says they’re looking to target “average” inflation of 2% – though are *very* vague about over what time frame.
If we’re being forward looking, then literally every TIPS breakeven inflation rate is showing expected inflation over 2% – whether you’re looking at a 5, 7, 10, 20, or 30 year span. (This has been the case since early 2021.)
Looking backward, the ONLY time frame where average annual CPI inflation has been under 2%, ending in November 2021, is if we choose 2008 as our starting point.
All to say, it would be very hard for the Fed to justify *not* tightening up its policy at this point.
UPDATE in response to a question on Facebook. The question:
We were worried about a lack of inflation over the previous 12 years or so right? I remember headlines ” Why us inflation so low?” Is this partially an adjustment combined with supply chain problems and a pandemic?
I think it depends who you mean by “we”. But, there were some concerns for a while, though from October 2016-January 2020, CPI inflation was hovering consistently between 1.5% and 3%. So, it feels to me like that problem had faded.
Lots of things are going on that could explain this. Nominal GDP is basically back on trend now. Real GDP is a little higher than where it was pre-pandemic, but definitely not back on trend. Put another way: spending has recovered, but production hasn’t yet (running some quick stats, I estimate we’re about 2-3% below trend) – so we’re spending that money by paying higher prices rather than on (much) more stuff. This is consistent with there being some lingering supply-side issues.
On the monetary side, we saw a big increase in M2 money supply in early 2020, but M2 velocity tanked at the same time – people were basically just holding the new money rather than spending it (not surprising given the combination of virus fear and lockdowns). Since then, the money supply has continued to increase (though at a somewhat slower pace), but velocity has held constant – the new money is actually being spent basically at the pace that it’s being created.
Now, there is something of a philosophical debate here in terms of what monetary policy should do. NGDP targeters are, I suspect, fairly content with things at the moment. (Though Scott Sumner did recently suggest inflation rates are too high, and that the Fed should focus on fighting inflation – but his estimates for ideal inflation aren’t way off of current levels.) Meanwhile, those that are more concerned about money growth, price levels, or inflation rates are more disturbed. (In July, John Taylor compared the Fed’s current stance to that of the Arthur Burns Fed of the 1970s.)