Regardless of policy or the pandemic, price surges have their own remorseless mathematics ANOTHER MONTH, another multi-decade high in American inflation. The consumer-price index increased by 6.8% in November compared with a year earlier, according to figures released on December 10th—the fastest pace since 1982. If these headlines about inflation highs seem like clockwork in America, that is because, to a significant extent, they now are. Such are the basic mathematics of year-on-year price trends. The surge in inflation since the start of 2021 means that it is guaranteed to remain elevated in annual terms for a while to come. A relatively optimistic forecast would have inflation returning to its pre-pandemic norm only at the very end of 2022. To understand why, consider the underlying numbers. In 2019, the year before covid-19 emerged, the average month-on-month increase in consumer prices in America was 0.2%. That was marginally lower over the course of 2020, when activity briefly shuddered to a halt and then roared back to life. But in 2021, as the recovery gained altitude, prices shot up by an average of 0.6% month-on-month. That surge is now making its impact felt on annual price comparisons. Imagine, for instance, that the consumer-price index in November remained at the exact same level as in October (or put differently, that there had been zero month-on-month inflation). Even then, the year-on-year increase in November would have reached 6.3%, the fastest pace since 1990. In fact the additional month-on-month gain, of 0.5% (before seasonal adjustment), propelled it higher still. What does the future hold? The chart presents two alternative paths. In the first case, inflation momentum immediately falls back to its pre-pandemic trajectory, with prices rising by 0.2% each month. That would be a very benign outcome for America. Nevertheless, in December the year-on-year figure would still climb to yet another four-decade high. In the first half of the new year, inflation would average a lofty 5.4%. Only in December of 2022 would it recede to a level consistent with the Fed’s inflation target, which is 2%, albeit based on a different measure of prices. In the second case, inflationary momentum is unchanged, staying at the same month-on-month clip registered over the past year. This would make for many a sleepless night for American officials. Inflation would soar to nearly 8% in February before receding a little. Were monthly price trends to remain at 0.6%, inflation would eventually settle at a year-on-year plateau of 7.4%. Both of the scenarios are likely to be a little extreme—the first overly optimistic, the second too pessimistic—but are useful thought experiments about the outer boundaries of price trends in America. (Of course, one could posit even more extreme scenarios, with inflationary expectations becoming unmoored and prices spiralling ever higher or, at the opposite end, supply chains suddenly working without a hitch and causing deflation. Those, however, are low on the probability scale.) The details of the November figures suggest that the more pessimistic scenario will be closer to the mark at the start of 2022. Prices for vehicles, an outsized contributor to inflation over the past year, are rising again. Supply-chain backlogs have improved ever so slightly but are still weighing on industry. Energy prices are still high. And rising rents have started to feed into broader price pressures. The challenge for President Joe Biden and, above all, the Fed is to bend the price curve towards the more benign outcome. In this regard, there is some cause for optimism, even if it will take a while to see results. First, the giant fiscal stimulus that helped stoke demand in America is running its course. Second, the Fed is moving towards tighter monetary policy. On December 15th the central bank is expected to accelerate the pace at which it “tapers” its monthly purchases of assets, mostly government bonds. That would open the door for it to raise interest rates as early as March, which should mark a decisive turning point in the battle against price pressures. In the meantime, brace for a few more months of multi-decade highs in inflation. It is in the stars and, most crucially, in the sums.
