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Rather than presenting a good news/bad news story, today’s official U.S. figures on one key measure of inflation (bringing the story through December) put into pretty clear focus an important old news/new news story. And its main implication is that the current version of lofty inflation looks considerably different from the standard versions that have hit the nation previously. Therefore, it’s looking more “transitory” (at least in terms of stemming mainly from developments specific to the CCP Virus epidemic) than ever.

This distinction of course matters because evaluating the nature of today’s inflation will greatly influence how American policymakers (especially the Federal Reserve) respond, and how they should respond. If today’s price increases stem from standard sources, then a standard response – tighter monetary policy, less government spending – make sense. If current inflation is distinctive, more austere economic policies stil may be needed for any number of reasons, but inflation-fighting won’t be a strong one.

The new news? The U.S. government tracks two main measures of inflation: Overall price increases, and price increases for “core” goods and services. The latter gauge strips out food and energy prices – because ordinarily they’re supposed to be extraordinarily volatile for reasons mainly unrelated to the economy’s underlying inflation prone-ness.

But today’s inflation data (for what’s called the Consumer Price Index, or CPI), demonstrates that during the virus era, the core price increases have been more volatile than their overall counterparts.

Let me make clear two crucial points right at the outset, though: First, as I’ve written previously, “transitory” (a term used for months but “retired” recently by the Federal Reserve) doesn’t necessarily mean “short-lived.” That’s because the virus itself and its effects may well not be short-lived. Indeed, because of the unusually rapid spread of the Omicron variant, pandemic-related and inflation-fueling economic disruptions could well last for months more.

Second, viewing today’s inflation as transitory doesn’t mean that the Biden administration and Congress may not have made a serious mistake in supporting a major round of economic stimulus earlier this year – and therefore greatly boosting Americans’ spending power while the amount of goods and services remained limited for all sorts of (CCP Virus-related and other) reasons.

At the same time, precisely because the last stimulus bill was explicitly linked to the the pandemic’s effects, because the infusion of new money has been running out, and because President Biden’s Build Back Better bill looks pretty dead in Congress, this fiscal policy mistake’s effects are looking transitory, too.

Don’t forget, moreover, the immense monetary policy support for the economy provided by the Fed. It’s virus-related, too, and yesterday, Chair Jerome Powell made clearer than ever his view that the case for such emergency assistance no longer holds, and that the central bank’s decision to start withdrawing it is firmly on track.

In addition, some of the old news (at least for RealityChek readers) about today’s inflation still holds – and further reenforces the case for “transitory-ness.” And this old news concerns the baseline effects phenomenon – by which unusual results recorded at the beginning of a period of time in which comparisons are made exercise powerful, but intrinsically, misleading results at the end of that period. In this instance, the unusually low annual inflation numbers of 2019-2020 have been bound to play a significant role in generating abnormally strong increases for 2020-2021. (BTW, savvy investors take these baseline effects into account when evaluating stock performance, too. Just Google “easy comps.”)

Nevetheless, even this old news now reflects some of the new news. Meaning that for overall inflation, the baseline effect is fading and will continue to fade for the next two data months. For the core, however, the baseline effect will stay strong through March.

The month-by-month and year-by-year figures for both overall and core CPI illustrate all of these points nicely. First, let’s review the monthly changes in overall CPI for this calendar year:

Dec-Jan:                          0.26 percent

Jan-Feb:                          0.35 percent

Feb-March:                     0.62 percent

March-April:                  0.77 percent

April-May:                     0.64 percent

May-June:                      0.90 percent

June-July:                      0.47 percent

July-Aug:                      0.27 percent

Aug-Sept:                      0.41 percent

Sept-Oct:                      0.94 percent

Oct-Nov:                       0.78 percent

Nov-Dec:                      0.47 percent

That new December figure represents both the smallest such increase since July, and a big slowdown from November. So that’s a noteworthy sign of transitory-ness right there.

Yet on a monthly basis, as shown below, core inflation actually quickened a bit in December:

Dec-Jan:                      0.03 percent

Jan-Feb:                       0.10 percent

Feb-March:                  0.34 percent

March-April:                0.92 percent

April-May:                   0.74 percent

May-June:                    0.88 percent

June-July:                     0.33 percent

July-Aug:                     0.10 percent

Aug-Sept:                    0.24 percent

Sept-Oct:                     0.60 percent

Oct-Nov:                     0.53 percent

Nov-Dec:                    0.55 percent

A closer look, however, shows that the core’s ups and downs have been greater than that for overall inflation, and that was especially true early in the pandemic. From January through April, it skyrocketed from 0.03 percent to 0.92 percent, whereas overall price increases went up more slowly (though still impressively), from 0.26 percent to 0.74 percent.

Similar increase patterns are revealed in the annual overall and core inflation increases, but the volatility trends are somewhat different. First, the overall data:

Jan:                             1.37 percent

Feb:                            1.68 percent

March:                       2.64 percent

April:                         4.16 percent

May:                          4.93 percent

June:                          5.32 percent

July:                           5.28 percent

Aug:                           5.20 percent

Sept:                          5.38 percent

Oct:                            6.24 percent

Nov:                           6.88 percent

Dec:                           7.12 percent

Here the nation has experienced not only accelerating annual inflation, but a fourth straight month of acceleration.

Ditto for annual core inflation:

Jan:                            1.40 percent

Feb:                            1.28 percent

March:                       1.65 percent

April:                         2.96 percent

May:                          3.80 percent

June:                          4.45 percent

July:                          4.24 percent

Aug:                          3.98 percent

Sept:                          4.04 percent

Oct:                           4.58 percent

Nov:                          4.96 percent

Dec:                           5.49 percent

But rather than being more volatile early in the pandemic period, these prices sung the most between last June and September, and during December. Still, if the volatility of overall and core inflation have been in the same ballpark lately, that’s an indication that this most recent burst of inflation has broken the mold.

The baseline effects are also signaling the recent outsized volatility of core inflation. Since it was so unusually depressed early in the first pandemic year 2020, these effects, as mentioned above, will stay prominent in January and February, too. But the baseline effect for regular inflation is already fading and will continue on that path. 

As has been the case for nearly two years now, however, the wild card remains the CCP Virus and now its Omicron variant and even more particularly, government reactions to its stunning transmissability. Moreover, it’s not just the Biden administration that may contribute to inflation-boosting supply chain bottlenecks and shortages due to vaccine mandates, other curbs, and their impact on individual fears and behavior. China’s ongoing Zero Covid policy looms as a major threat, too.     

All of which brings up a point made by Stanford University medical school professor Jay Bhattacharya, a leading public health authority. He’s repeatedly written that “The end of the pandemic is primarily a social and political decision” because although “we have no technology to eradicate the virus,”`the knowhow and strategies for reopening safely and sustainably are already available. If, as I believe, he’s right, then ending virus-induced inflation and making it truly transitory is well within reach, too.