A Little Ditty about April Inflation

If you have paid attention lately, April’s CPI number came out and everyone is atwitter. Apparently, inflation is back and is wounding the stock market and like a Bono reunion, it is causing quite a stir.

Us older folks remember the 1970s when inflation kept rising and eventual turned into something called stagflation. We surely don’t want that to happen again. And it snuck up on us after almost no inflation during most of the 1960s, it seemed to surge out of nowhere via excessive money emission and government deficits. Food and energy crises definitely helped.

Given all the crazy things happening lately it is no wonder inflation is catching our attention and concern. But let’s be honest – the news media sector doesn’t much care if they are correct as they benefit from colorful story-telling.

I decided to get away from all the theorizing this week and focus more on the common sense of numbers. The main point here is that what goes up often comes down. That has something to do with gravity. But what about when something goes down? Does it have to come back up? There is no rule of gravity to help us there.

If something typically grows by 3% per year and then it grows by only 2% this year – we expect it to mean reverberate. We expect it to go back to 3%. That means it might hit 4% this year as the 2% and the 4% average to 3%. No, it isn’t always that simple – but if a phenomenon really does average 3% then it is reasonable to think it will go back to that after it has temporarily diverged.

The consumer price index is a commonly used measure of the prices of things the average consumer buys. It is published each month. In April of this year it sprung to a value of 266.8. In April of 2020, it had been 256.2 so the one-year increase was about 4.1%. That’s a big number for inflation these days. Markets went crazy.

But one thing the market seems to be missing is that The CPI went from 255.3 to 256.2 between April of 2019 to April of 2020. That was a small increase. In percentage terms it was 0.35%. That’s hardly different from zero! That shows you that 2020 was a really unusually crazy year. Zero inflation! Many commentators admit that most of the things happening that year (Covid, a recession, and Tuna’s colonoscopy) may have caused temporary changes in inflation. Clearly a Zero percent inflation is unusual and not expected to last.

So what might you expect in the next year? In 2021? Perhaps a movement back to normalcy? And that’s what happened.

The CPI in April 2017 was 244.3 rising to 255.3 in April 2019 – for a two-year inflation rate of about 4.5%. The two-year inflation rate from April of 2019 of 255.3 to this April of 266.8 was again 4.5%.

Hmmm. The two year inflation rate from 2019 to 2021 was exactly the same as the average of the previous two years – 2017 to 2019. And people were not jumping off buildings because of inflation.

Yes, we had a serious rise in inflation in the past year. Does that mean trouble? Maybe. But it might also mean we are headed back to some sort of normalcy. But, of course, normalcy doesn’t sell airtime.

Last point. Once the temporary factors recede, we are left with a chance to bring our monetary and fiscal situation back to something less crazy. If we don’t, I am afraid that stronger growth coupled with excessive policy stimulation will be enough to bring us back to Jaws, One Flew Over the Cuckoos’ Nest, and the 1970s. Still got those cool bell bottoms?