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Saturday, July 31, 2021

Some, but Not All, of the Price Jump Is Transitory

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The surge in prices in April was a shocker. Excluding food and energy, the core index rose 0.9% from March, the biggest one-month increase since 1981, and three times more than Wall Street expected. This was as surprising as the subdued April payroll increase reported just five days earlier.

The 12-month core inflation rate jumped to 3%, the highest since 1995. This was partly due to “base effects” as price drops in April 2020, when pandemic closures were taking effect, exited the 12-month calculation. But base effects cannot explain the March-to-April jump.

Subdued jobs growth and strong price increases in April together suggest resurgent demand, fueled by vaccinations, stimulus checks and low interest rates, is bumping up against sluggish supply.

Some of this is clearly transitory and will reverse once the economy is fully reopened. At this point it’s impossible to tell how much, but there are signs that at least some isn’t transitory.

Three broad trends are apparent, as illustrated by airfares, used cars and restaurant meals.

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