These days, everyone is talking about inflation. And by everyone I really mean a lot of economists and Wall Streeters, who may or may not be a substantial chunk of your Twitter feed, depending on your reading habits. The financial media and much of America’s wonk class have been gabbing about the topic for months now, mostly because some people are worried that Washington’s recent spending on coronavirus relief could cause prices to surge like it’s 1969 again, other people think that those people are hyperventilating dolts, and bond traders are just trying to adjust their portfolios appropriately. The point is: People have their eyes on it.
And beginning this week, the government’s inflation data is going to start looking kind of freaky. On Tuesday, the Bureau of Labor Statistics will release its monthly update of the consumer price index, and to a casual reader scanning the news, the headline numbers could make it appear that the cost of living is quickly accelerating, even if nothing of the sort is actually happening. As think tankers at the Roosevelt Institute recently warned: “Starting April 13, and continuing for the next several months, what is in effect an optical illusion is going to seriously distort inflation numbers as they are normally reported, and opponents of more public spending will be quick to pounce.”
The issue itself is pretty simple. Normally, economists track inflation by looking at the change over a 12-month period. But last spring, consumer prices began to fall thanks to the onset of the coronavirus crisis. Since then, they’ve rebounded without quite returning to their pre-COVID trend. But year-over-year comparisons back to the moment when prices were in a ditch will make it look as if inflation is suddenly galloping out of control.
This chart from economist Jay Shambaugh and Brookings provides a useful view. As you can see, the Federal Reserve’s preferred price indexes are still pretty far below where they would be had they kept rising at a steady 2 percent annual rate, which is the central bank’s target. But they are a heck of a lot higher than during the temporary dip last spring, which is about to become the point of comparison.
Here’s another simple way to think about the problem, as explained by the Roosevelt team: If prices didn’t rise at all in the coming months (unlikely, but bear with me), the government’s inflation gauge will go up by 2 percent in March, 2.7 percent in April, and 2.8 percent in May, on a year-over-year basis. If the Fed is actually on target to hit its 2 percent medium-term average inflation target, the year-over-year CPI numbers will be 2.2 percent for March, then 3.1 percent for April, then 3.5 percent for May. In other words, it will look high, but it will really just be on its way back to normal.
So, if the headline inflation figure that people usually rely on is useless for the next three months, what number should people track? Shambaugh told me that he’s primarily going to watch the annualized rate of inflation over the last 24 months, which should smooth out the impact of COVID. Mike Konczal, Roosevelt’s director of progressive thought (yes, his actual title), told me he’d be monitoring the rate of inflation starting from January of 2020. Either way, the trick is to use a baseline that isn’t affected by the coronavirus dip. And if you notice someone shrieking on CNBC about the inflation report, be aware that there is a strong chance they’re freaking out about a statistical mirage—or they’re full of hot air and they know it.
Update April 13, 9:11 a.m.
And we have data! The Consumer Price Index did indeed jump 2.6 percent on an annual basis in March. But excluding volatile food and energy prices, it increased 1.6 percent. Shambaugh notes that, over a two-year period, Shambaugh notes that CPI is averaging around 2 percent right now.
Final verdict: Not particularly freakout worthy.