Inflation

 At the bottom of this post is a table with monthly and annual inflation rates from February of 2011 to September of this year. Pretty boring. But there might be a story there. 

I get sick and tired of the press. We all know that Walter Cronkite is gone and with him is gone a rational and unemotional summary of the news. Recent studies say the press exaggerates every thing and mostly they prefer to report bad news. 

Whether the topic is Covid or inflation we get a lot of scary reports. The title of an article in the Wall Street Journal this week reads "Supply-Chain Bottlenecks, Elevated Inflation to Last Well into Next Year, Survey Finds." That's just one of many reports that claim we are stuck with an inflation problem.

I am not going to argue with that possibility but I will say that given today's environment, nobody knows squat about future inflation. Between Covid induced supply-chain disruptions, huge government deficits, and  a new waterfall of money from the Fed, we are in uncharted waters. 

So I decided I would spend a few minutes looking at the inflation numbers. I chose the Consumer Price Index. I downloaded the numbers from the Bureau of Labor Statistics, the government organization that creates and reports these numbers on a month basis. bls.org   I took the raw monthly numbers and created monthly and annual averages. I also took percentage changes so we could view inflation rates rather than CPI levels. The monthly numbers are annualized by applying a factor of 12 to any month's percentage change. 

If you just gaze at the whole table you come away with a notion that these monthly inflation rates look like a hare running from a hungry German Shepherd. For example, inflation was 11.7% on an annualized basis in March of 2011. In June, there was deflation of 1.3%. Wow, that's quite a change. Inflation one month; deflation a couple months later. Don't stare at the table too much or you might get dizzy. 

Covid is believed to have started getting serious in the second quarter of 2020.  Between March and August the inflation rate dives down and then swings up. The average for the full year of 2020 is, however, only 1.4%. It is not until 2021 that we see the inflation getting much higher, with rates between 5.1% and 11.1%. Clearly the chart has changed in 2021. 

But notice that the numbers are still a little higher than average but clearly lower by August and September, 2.5% and 3.3%. The average for 2020 is 1.4%, lower than the previous 4 years. Notice too that the average for 9 months of 2021 is 6.9%. That's much higher than any of the years before. 

We don't have October numbers yet but we shouldn't be too crazy about one month. Look at the table. The numbers swing all over the place. October won't prove a thing. But clearly, if October comes in at around 4%, that number will be lower than most of the months of 2021. 

We should expect a gradual decline anyway. We won't just automatically pop back to 2%. Why? First, thanks to a very loud press screaming and crying about rising inflation, this could easily cause inflationary expectations to rise. Already wages are heading upward. So are some interest rates. Expectations can be self-fulfilling. We expect more inflation and then we get it. 

The other reason why inflation might not drop back down to 2% quickly is government policy. Government is piling stimulus upon stimulus. Soon they will start to reverse engines. But until they do, its hard to imagine inflation coming down very quickly. Notice that now that some supply bottlenecks are easing, retail sales are starting to jump. With interest rates near zero and lots of government income subsidies, it's hard to imagine inflation falling very fast. 

Where is inflation heading? Probably to more of the same jack rabbit ups and downs. Will it get much worse. I don't know. It depends a lot on household expectations and future government policies. If you can forecast those things then you will be the expert. Good luck with that. 

Table. Consumer Price Index annualized monthly and yearly percentage changes.