I created the above chart to highlight the WSJ article The Fed’s Inflation View Is All About That Base.

Federal Reserve officials are talking a lot these days about base effects. That relates to how the economy looks now compared with a year ago.

The problem is when something screwy happens a year earlier. The base from which a year-over-year comparison is calculated becomes distorted.

Case in point: Earnings per share for companies that make up the S&P 500 stock index were up 225% in the first quarter this year from a year earlier, according to S&P Global, in part because they took such a big hit during the January through March period of 2020.

The Fed is now struggling with this challenge as it relates to inflation. The consumer-price index was up 4.2% in April from a year earlier, about double the central bank’s inflation target of 2%. In April this year, the index was up 4.5% from two years earlier.

Carl Tannenbuam, chief economist at Northern Trust bank, estimates these effects will fade later in 2021 as comparisons with 2020 become less dramatic. Then, he said, base effects will reassert themselves in 2022 because the early months of 2021 have been distorted by reopening.

Unprecedented Events

Here are two additional charts I created to highlight the unprecedented nature of what's happening on the inflation front.

CPI Percent Change From 1 and 2 Years Ago 

The Year-Over-Year CPI negative impact of Covid-19 was in May of 2020. The percent change from a year ago and from two years ago are now about the same.

PCE Percent Change From 1 and 2 Years Ago

PCE stands for Personal Consumption Expenditures. It is more heavily weighted to medical expenses and less than rent than the CPI. 

The Fed's preferred measure of inflation is the PCE. It has consistently be running under the CPI measure of inflation.

Both measures are flawed, in similar and different ways. And both measures understate inflation because neither includes actual housing prices. 

For discussion of the CPI distortions please see Hello Fed, Inflation is Rampant and Obvious, Why Can't You See It?

Just because it's rampant and obvious does not mean it will stay that way. 

Most think it will but a few of us don't as noted in Add David Rosenberg to List of Those Who Believe Inflation is Transitory

This is an important theme. I will have more updates shortly.