Fears of rising inflation are much ado about nothing
Inflation fears have raised their head again. While central banks are keeping money loose, many observers are warning that Covid-19 induced supply and demand shocks have produced upward price pressures for the first time in three decades. Bob Hancké takes a(nother) critical look at the data and the arguments.
The chorus is swelling, like in a Verdi opera. Inflation has now officially been declared public enemy number one (well, number two, after the Delta variant). Even usually level-headed observers seem to be lying awake at night wondering how to address this. Well, they can sleep soundly: it’s all much ado about nothing. Here’s why.
Too few observations?
First, one data point does not an inflation make. Inflation is a persistent rise in the price level. By definition, one observation cannot be a persistent rise. Obviously, one rise now can mean many rises in the future. But it can also mean a drop in prices in the future – much of it depends on your underlying theory of inflation (see below) and how that sits with the basic facts.
Second, it turns out that most of the inflation that everyone gets so worked up about is concentrated in a few sectors that are usually not known for their inflationary pressures, such as second-hand cars (in the US) and air travel (almost everywhere). But the evolution of prices in both of these, which account for a large part of consumer price increases today, are fluke events.