A 4.15% inflation rate! Do we need to slam on the breaks before our life savings dwindle to nothing?
Chill out: we don't need to panic. That big headline number is mostly an artifice of how the inflation rate is typically reported, and absolutely nothing more.
Inflation is reported by comparing the current price level to the price level one year past. Normally, that makes sense -- how have prices changed over the last twelve months? But the price level one year ago, like everything else one year ago, was not exactly normal. And there's the rub.
Think back to April of 2020. At the start of the month, new Covid infections were doubling every seven or eight days. All across the country, people were retreating into the safety of their own homes as much as they possibly could. Consumer spending was crashing. Twenty million jobs were disappearing almost overnight. And so, not surprisingly, prices were falling.
The drop was big--CPI fell about 1% between February and May, which would translate to a -4% inflation rate if it lasted a full year -- but it was not particularly newsworthy, given everything else that was going on. And unlike other price drops, it was not just in the volatile food and energy sectors: the Chained-CPI excluding food and energy fell 0.6% in that three-month span, the equivalent of a -2.4% annual inflation rate.
But it means that when the government reported an inflation rate of 4.15% for this April, it was comparing the current price level to one that was artificially depressed a year ago, making that 4.15% number artificially inflated. The obvious solution is to compare April's price level not to the Covid-depressed price level of April 2020 but to pre-Covid April 2019.
That comparison shows that this April's price level was 4.51% higher than it was two years ago, which translates to an annual inflation rate of 2.23%. Better yet, if we do the same comparison using the less volatile Chained-CPI excluding food and energy, the annual inflation rate was 1.92%. Since the Fed has set 2% as its target, it is no wonder it isn't panicking. And neither should you.
Incidentally, this same issue will affect the reported May inflation rate when it comes out, and to a decreasing extent, the reported inflation rates for the rest of this year. But as long as that reported rate is under about 4.3% for May and under about 3.1% by September, there is no inflation to worry about. The "surge" in inflation being reported will be nothing more than prices readjusting from the pandemic shock they experienced a year ago.
