Don’t Dismiss Inflation Fears Just Because They Were Wrong Last Time

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There are reasons to think inflation won’t become a major problem. That everybody who said the economy faced an inflation threat over the past dozen years ended up being dead wrong isn’t one of them.

In its report on May personal income and spending Friday, the Commerce Department said that its measure of consumer prices rose 0.4% last month from April, putting them 3.9% above their year-earlier level. Prices excluding food and energy items—the so-called core that economists watch to better understand inflation’s trend—were up 0.5% versus April and 3.4% versus a year earlier.

The Commerce Department’s inflation figures are the ones the Federal Reserve prefers, but even though the on-year rises in overall and core prices are now well north of the Fed’s 2% inflation target, the central bank doesn’t seem particularly worried.

One reason is that, since prices slipped when the Covid-19 crisis struck in the spring of last year, the year-over-year comparisons are a bit magnified. Versus May of 2019, both overall and core prices have risen 2.2% annually. Another is that supply-chain bottlenecks are pushing some prices higher in ways that are unlikely to persist. Friday’s data showed that used-car prices were up by 38% in May from a year earlier, for example, while car-rental prices were up 115%. It is more than a stretch to think those prices will keep soaring like that over the next year.

Still, even though Fed policy makers expect inflation to drift down to about 2% next year, it may well stay heated for a while. Supply-chain problems might persist to the point that higher prices make their way into consumers’ inflation expectations, for example. In their struggle to find workers, employers might also have to raise wages to the point that prices get pushed higher.

A shopper visits Macy’s flagship store in New York City last month.



Photo:

eduardo munoz/Reuters

Given that the Fed and most private forecasters have habitually overestimated how much consumer prices would rise, and considering the regular appearance of false prophets who have predicted dangerously high inflation only to be proved wrong again and again, it is easy to pooh-pooh inflation concerns now.

It is important, however, to recognize how different the circumstances are now than what prevailed in the years since the last recession. The pandemic has elicited not just supply-chain bottlenecks, but shifts in consumer preferences and perhaps an increase in workers’ bargaining power. As a result, the rules for where prices are heading might not be the same.

Inflation might not be a problem a year from now, but the inflationistas’ preternatural habit of being wrong won’t be why.

Recently, the U.S. inflation rate reached a 13-year high, triggering a debate about whether the country is entering an inflationary period similar to the 1970s. WSJ’s Jon Hilsenrath looks at what consumers can expect next. Photo: Alexander Hotz

Write to Justin Lahart at justin.lahart@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the June 26, 2021, print edition as ‘On Inflation, This Time Is Different.’

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