The sharp rise in US inflation in 2021 may or may not be transitory, but history reminds that the numbers to date aren’t unusual.
A popular way to present the runup in pricing pressure is to use rolling one-year changes. Nothing wrong with that, but like every choice for analyzing data there’s an embedded bias. For rolling data, the bias is to highlight recent data, which in this case emphasizes the extreme shift of late.
From this perspective, it’s clear that inflation has turned sharply higher and the shift looks like an upside outlier in the extreme vs. the past decade. End of story? Not quite. If we re-run the data using levels, the data is shown in a different, and arguably superior context.
The next chart presents the evolution of the headline Consumer Price Index since the start of each economic expansion in the past 50 years. As you can see, the current rebound in pricing pressure isn’t unprecedented. Although the inflationary pressure of late (red line) is the strongest in recent history, it trails the inflation run in the expansion of the 1970s and the short-lived growth spurt of 1980-1981 (the two lines that run above the red line).
Looking at core CPI, which strips out food and energy prices, offers a clearer measure of inflation’s trend. On this basis, the case for seeing the latest pop as middling is a bit more convincing.
Jurrien Timmer, director of Global Macro at Fidelity, offers a much longer comparison – starting in 1871 – and finds a similar result, namely, the current run of inflation is middling.
The charts above don’t negate the inflation risk that’s currently bubbling, but showing the trend in levels reminds that the inflation surge of late isn’t forging a new precedent. That doesn’t mean that the risk is low. But looking at the number through this lens provides another lens for deciding if the transitory narrative is still relevant.