Inflation in the United States is rising. Paul Krugman is circumspect:
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 were, Biden’s spending plans might be excessive and the Fed might need to consider raising interest rates sooner rather than later.
However, Krugman argues, the inflation numbers are driven by bottlenecks in the economy, not overall inflation:
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.
The same thing happened in 2011:
And inflation hawks went wild. Representative 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 wasn't 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.
Things calmed down. What lessons can we draw from this?
First, you shouldn’t have a hair-trigger reaction to short-term 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?
As inflation numbers rise here, we should keep that recent history in mind.