Inflation on the Rise?

We seem preoccupied with inflation again. I am not convinced we should be. 

Maybe you remember or heard about the 1960s and 1970s. Inflation built from just about zero in 1960 to 5.7% is 1970. And then in the 1970s it jumped even more -- to 11.3% in 1979 and then rising to 13.5% in 1980. If you take two decades, we went from near zero to almost 14% per year. 

That's quite a change. No wonder we worry. From October of 2020 to October of 2021 inflation rose by 6.2%. When you compare that to the near 14% of 1980, the 6.2% looks small in comparison. But that's not the best comparison.

If you calculate the average inflation rate between 2011 and 2020 -- a ten year period -- the average rate was 1.8% per year. During those 10 years the inflation rate never got higher than 3.2%. It came in at 0.1% in 2015. 

If you compare the rate of 6.2% over the past year to any of the 10 years before it, the 6.2% looks pretty high. How did we get from 10 years of 1.8% per year to 6.2%? The highest rate in the past 5 years was the 2.4% in 2018. It was 1.2% in 2020.

What is going on here? Are we headed back to the 1970s? Or is the 6.2% over the last year going to go out as quickly as it came in. 

If you read the newspapers, you know there are several reasons why the inflation rate might have increased in the past year. The economy has strengthened and the unemployment rate is lower. Covid induced supply shortages could be the culprit. Or maybe it is the result of the Fed's excessive monetary stimulus or the government's incredibly large deficits. 

Or maybe it is none of those things. I took a look at the last year and wondered if the inflation was general or specific. I found some strange changes. Prices of energy services rose by 59%. Prices of energy commodities rose by 30%. Used cars were going for 26% more. Yet medical care rose by only 1.7% and transportation services were up 5%. Food prices up 5% and shelter up only 4%. 

To me that sounds less like general inflation and much more like specific pockets of shortages. If we were suffering through a typical macroeconomic or demand induced  inflation, wouldn't the prices of transportation, food, and shelter be rising faster? 

Putting 2 and 2 together -- this seems like a strange time. The abrupt transition from many years of low inflation to one year of higher inflation plus the absence of real inflation coming from basic needs seems to argue for something both unusual and not structural or lasting. 

Nevertheless, caution might suggest that the Fed and the government rethink their massive stimulus programs as we wait and watch to see how specific sectors recover from what ought to be short-term supply bottlenecks.  Over-regulation in energy and transportation might also be re-thought.