Is Inflation Still Transitory? New Data Raise More Questions

The inflation-is-transitory narrative took a beating in yesterday’s hotter-than-expected report for US consumer prices in May. Even after accounting for so-called base effects (temporary pandemic-related factors driving inflation higher), pricing pressure has accelerated.

It’s tempting to declare that the debate about the inflation trend is dead after reviewing the latest numbers on the consumer price index (CPI). But it’s still premature to conclude that a hotter inflation regime that persists is now an enduring feature of the US economy. Granted, that risk is higher than it has been in recent years. But it’s unclear how tenacious the ramp-up in pricing will be as the country continues to transition from a pandemic shutdown to something approximating “normal” conditions.

Taking the numbers at face value, however, certainly looks worrisome. Consider the surge in the rolling 12-month change in core CPI, which strips out food and energy prices. (Core CPI has proven to be a more reliable measure of the inflation trend vs. headline CPI, which includes food and energy, and so we’ll focus on it here.) In May, this gauge of inflation shot up to 3.8%, a 29-year high.

By some accounts, the latest report is the smoking gun that confirms the worst fear: inflation has ramped up and will remain so for the foreseeable future, perhaps rising further. The counterargument is that pandemic effects are still in play and so the recent upside volatility in CPI data may be misleading. That’s the view of the Federal Reserve and, for the moment, some degree of private economists.

“A lot of the surge in prices are for things that are just normalizing,” says Mark Zandi, chief economist at Moody’s Analytics. As examples, he points to prices for “hotels and rental cars and used vehicles, sporting events, restaurants. Everyone is just getting back to normal, so pricing is just returning to what it was pre-pandemic.”

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Disclosures: None.

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