Worst Inflation Ever?

The November 2021 CPI announcement created quite a stir. But as usual, the press had to shriek rather than analyze. What I witnessed was a press screaming that inflation in November reached a number so high that even Snoop Dog has never been that high. The press swooned that inflation had not been so high in decades and decades. 

The actual number for CPI inflation in November amounted to a change of 6.81% from November of 2020 to November of 2021. For those of you who remember or who have read about the 1970s, we would have appreciated a rate of 6.81% but that was then and this is now. 6.81% in November of 2021 is not what we want. 

What most of us don't know and we are still discussing is whether or not that number is temporary and fleeting or whether it is a bell weather of what is to come. My crystal ball is at the dry cleaners now so I won't be able to tell you which is which. I will take a guess below. 

But I can request that we back up a bit and examine what is really going on with the numbers. Should we be hysterical about this 6.81%? If you returned from a vacation to another planet recently you might be surprised by the increases in debt by our government and the extent to which the Fed has monetized all that debt. Inflation would not surprise you after all that. And then when you learned about the supply constraints caused by Mr. Covid, you would appreciate why inflation might be rising faster than Elon Musk in his newest rocket ship. 

The CPI is a number that represents the average price of the things we buy -- both goods and services. The BLS sends out a bunch of munchkins every month and they figure out how much all that crap costs in that month. Everything from lettuce to Lexus is counted. Pretty big task, eh. But they do it every month and they publish a number for that month. We call that the CPI value. We now have one for November of 2021.

Inflation is a word that defines how much that CPI level changes over time. We can calculate the percentage change of the CPI from October to November of 2021. That would represent inflation over the period of one month. We can also take the percentage change from November of 2020 to November of 2021. We call that the annual inflation rate. That is what came in at 6.81%. Wow. That's pretty impressive and the press is right to say that 6.81% for a whole year was a real zinger. 

But hold on. This way of calculating an inflation rate from November of one year to November of the next year only uses two months in the calculation. What about the other months? Don't they matter too? And doesn't this method emphasize those two months too much? 

Yep. that's very true. Luckily we have another way to calculate an ANNUAL inflation rate. If we average the one month rates for all 12 months between December of one year and November of the next one, we get an annual average that reflects all those months -- not just two months! If you do it this way., you find that the annual rate was about 4.5%. 

What can we compare that 4.5% to? You could compare it to the average over 2012 to 2019. That pre-Covid inflation rate amounted to about 1.6% per year. During those 8 years the annual inflation rate was as low as zero percent in 2015 and was mostly lingering around 2% in most years. 

What do you think about the average inflation rate of 4.5% over the past year? It is definitely higher than the Pre-Covid inflation rate of 1.6% and it is definitely higher than the 2% we saw in a lot of years recently. It is clearly not the 6.8% the press is swooning about. 

I suspect that given monetary and fiscal policy and given somewhat lingering supply shortages, inflation is not going to improve very much very soon. The supply shortages should dissipate but if our government does not remove the stimulus from their policies soon, 4.5% might herald a return to the 1970s. But today the 4.5% is more a warning than it is a tragedy.