Inflation deflated

Should President Joe Biden scrap his economic agenda because Americans are rushing to buy used cars? That’s pretty much what economists trying to draw big conclusions based on Wednesday’s inflation report from the Bureau of Labor Statistics are saying.

It’s true that while almost everyone was expecting a spike in consumer prices, the actual spike was bigger than expected. The one-year inflation rate went above 4 percent, surpassing its previous recent peak in 2011.

It’s not silly to ask whether unexpectedly high inflation means that the economy has less room to run than both the Biden administration and the Federal Reserve have been assuming; that could be true, and if it is, Biden’s spending plans might be excessive and the Fed might need to consider raising interest rates sooner rather than later.

But neither the details of that report nor recent history support those concerns; they suggest on the contrary that policymakers should keep their cool. This doesn’t look at all like 1970s stagflation redux; it looks like a temporary blip, reflecting transitory disruptions as the economy struggles to recover from pandemic disruptions.

And history tells us that it’s a very bad idea for policymakers to panic in the face of such a blip.

To see why, let’s revisit what happened in 2011, the last time we saw this kind of inflation blip.

There was a surge in consumer prices in late 2010 and into 2011, driven mainly by rising prices of oil and other raw materials as the world recovered from the 2008 financial crisis. Consumer price inflation hit 3.8 percent, just a bit below the latest reading.

And inflation hawks went wild. Rep. Paul Ryan (remember him?) grilled Ben Bernanke, the Fed chairman, over his easy-money policies, intoning, “There is nothing more insidious that a country can do to its citizens than debase its currency.”

Bernanke, however, refused to be rattled. The Fed stayed focused on “core” inflation, a measure that excludes volatile food and energy prices and that it (rightly) considers a better gauge of underlying inflation than the headline number. And the Fed’s cool head was vindicated: Inflation quickly subsided, and the dollar was not debased.

Policymakers elsewhere weren’t so levelheaded. Like the United States, the euro area saw a spike in headline consumer prices but not in core inflation. But the European Central Bank panicked; it raised interest rates despite very high unemployment, and in so doing worsened the continent’s burgeoning debt crisis.

The lessons of 2011 are twofold. First, you shouldn’t have a hair-trigger reaction to shortterm fluctuations in inflation. Second, when you do see a bump in prices, look at the details: Does it look like a rise in underlying inflation, or does it look like a blip driven by temporary factors?

Which brings us to last month’s price rise. Does it look like something to worry about? Not really.

It’s true that focusing this time on the usual definition of core inflation, excluding food and energy, doesn’t change the story much. Over the past 12 months core inflation was 3 percent, not too far short of the headline number, and in April alone core inflation was slightly higher than the overall inflation.

But a number of economists, myself included, have been arguing for a while that price changes over the course of the next few months will probably be bloated by temporary factors that conventional measures of core inflation won’t control for. A month ago I warned that “we’re going to have a weird recovery” with an “unusual set of bottlenecks” causing “a lot of price blips outside food and energy.”

Sure enough, those April price numbers were driven to a large extent by peculiar factors obviously related to the economy’s restart. When people talk about underlying inflation, they rarely have the price of used cars in mind; yet a 10 percent monthly rise in used car prices—partly because people are ready to travel again, partly because a shortage of computer chips is crimping new-car production—accounted for a third of April’s inflation.

There was also a 7.6 percent rise in the price of “lodging away from home,” as Americans resumed going places amid a waning pandemic.

Then there were “base effects”: A year ago many prices were depressed because much of the country was in lockdown, so that simply getting back to normal was bound to show up as a temporary rise in inflation. White House estimates that correct for these effects show considerably tamer inflation.

These arguments for discounting short-term inflation numbers aren’t after-the-fact excuses. I wrote about bottlenecks and blips a month ago; White House economists warned about misleading base effects around the same time. What we’re seeing is what we expected to see, just a bit more so.

None of this means that all is necessarily well with the Biden economic program. Maybe it will indeed turn out to be excessively ambitious. But the latest numbers, on either inflation or jobs, tell us nothing at all about whether that’s true.