Will The Initial Post-Pandemic Rebound In Inflation Persist?

Portfolio managers say that inflation has replaced the coronavirus as the primary risk for Wall Street, according to a survey released by Bank of America on Tuesday (Mar. 16). That may be understating the continuing if receding threat from the pandemic in the months ahead. Nonetheless, it’s highly likely that the inflation trend will rise as last year’s temporary bout of deflation, triggered by the initial coronavirus shock, washes out of the year-over-year data. The question is what happens beyond the initial rebound?

The future, as always, is uncertain, but in the near term it’s likely that we’ll see the annual rate of inflation revive. This is less about forecasting firmer pricing pressure vs. recognizing that the deflation last spring was always a fleeting affair.

Consider how the rolling one-year change in the US Consumer Price Index (on a headline basis) compares in recent history. As the chart below shows, the pandemic’s start took a dramatic bite out of the pricing trend, briefly cutting the annual rate of inflation to nearly zero. On a monthly basis, CPI was negative for three months – March, April and May.

In subsequent months, as the economy has recovered, inflation revived. In last week’s February update, CPI rose 1.7% over the past year – the highest in a year, although still below the Federal’s 2.0% inflation target.

As last year’s three-month run of monthly deflation falls out of the rolling one-year numbers, the inflation trend will rise – even if monthly CPI is flat. Consider three forecasts for comparison. One assumes that CPI’s monthly change will be zero for the next four months (March through June). A second forecast assumes a 0.1% monthly inflation rate, and a third is a 0.2% forecast. (The average monthly CPI change over the past year is roughly 0.1%.) Translating all three estimates into annual CPI changes shows a clear trend: higher inflation trend in the immediate future.

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Disclosures: None.

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