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Inflation Concerns: This is not your father’s hyperinflation

Summary:
To hear the discussion of inflation right now you would think we are staring at 13% inflation soon to be 24.5%. This seems to be true whether it is the local radio audience on the Jarrod Thomas Show, or Bloomberg TV, or your favorite newspaper. There are lots of reasons for general increases in the price level right now, some I would argue are good while others are not. However let’s start by being realistic about what the experience looks like. I looked at the gap between nominal securities and treasury inflation protected securities for three different maturities. One think that appears consistent across all the maturities is an increases in prices in the last year. Let’s emphasize that: this price increase started in April of 2020. The knee jerk reaction is that this is due

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John H. Cochrane writes Inflation, debt, politics, and insurance at Project Syndicate

David writes Sales Tax Collections in Fargo and Grand Forks

Tyler Cowen writes Covid and intertemporal substitution

Menzie Chinn writes CPI Undershoot Illustrated

To hear the discussion of inflation right now you would think we are staring at 13% inflation soon to be 24.5%. This seems to be true whether it is the local radio audience on the Jarrod Thomas Show, or Bloomberg TV, or your favorite newspaper. There are lots of reasons for general increases in the price level right now, some I would argue are good while others are not. However let’s start by being realistic about what the experience looks like. I looked at the gap between nominal securities and treasury inflation protected securities for three different maturities.

Inflation Concerns: This is not your father’s hyperinflation

One think that appears consistent across all the maturities is an increases in prices in the last year. Let’s emphasize that: this price increase started in April of 2020. The knee jerk reaction is that this is due to Biden Administration policies, some of which have not been implemented yet. The inflation those policies cause is not here yet, we are dealing with factors like supply chain disruption, goods shortages, and other pandemic issues from the last year and a bit.

Inflation Concerns: This is not your father’s hyperinflation

The shape is fairly consistent across the different maturities but the level is too. We are looking at inflation between 2% and 3%. Last year the Fed signaled a willingness to let inflation rise above the 2% threshold if other metrics were not in their preferred range so we will see if there really is a willingness to allow this to happen. The fact is inflation in many ways has been too low for too long, just like interest rates.

Inflation Concerns: This is not your father’s hyperinflation

Even with these increases the facts are that prices are still well under control and it would appear market expectations think this will be a shorter term phenomenon. The implied inflation in the 5 year graph is higher than the 10, which is higher than the 30 year. So it would seem this is, at some level, a passing phenomenon.

A bigger issue is that there are different types of inflationary pressures. Lockdowns ending will likely encourage a surge in spending on some things, while supply chain pressures and disruptions are going to impact prices too. These are not the same type of problem to confront, if you feel the need to tackle it at all.

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