Is It Time to Panic About Inflation? Ask These 5 Questions First.

Is It Time to Panic About Inflation? Ask These 5 Questions First.

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Typically, these relative price changes are not a problem of macroeconomics — something best solved by the Federal Reserve (by raising interest rates) or Congress (by raising taxes) — but a problem of the microeconomics of those industries.

The core challenge of an economy emerging from a pandemic is that numerous industries are going through major shocks in demand and supply simultaneously. That means more big swings in relative price than usual.

Last year, relative price changes cut in both directions (prices for energy and travel-related services fell, while prices for meat and other groceries rose). But this spring, the overwhelming thrust is toward higher prices. There are fewer goods and services with falling prices to offset the rises.

Still, many of the most vivid and economically significant examples of price inflation so far, like for used cars, have unique industry dynamics at play, and therefore represent relative price changes, not economywide price rises. One important thing to watch is whether that changes — whether we start seeing uncomfortably high price increases more dispersed across the full range of goods and services.

That would be a sign that we were in a period not simply of an economy adjusting itself, but one of too much money chasing too little stuff.

Not all price changes have equal meaning for inflation. Much depends on what happens next.

If the price of something rises but then is expected to fall back to normal, it will act as a drag on inflation in the future. This often happens when there is a shortage of something caused by an unusual shock, like weather that ruins a crop. In an opposite example, in 2017 a price war brought down the price of mobile phone service, pulling down inflation. But when the price war was over, the downward pull ended.

On the other hand, a price that is expected to rise at exceptional rates year after year has considerably greater implications. Consider, for example, the multi-decade phenomenon in which health care prices rose faster than prices for most other goods, creating a persistent upward push on inflation.

Hafta Ichi
Source: The NY Times
Keyword: Is It Time to Panic About Inflation? Ask These 5 Questions First.

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