Inflation show-and-tell

The 17 October 2021 "Meet the Press" transcript:
https://www.nbcnews.com/meet-the-press/news/meet-press-october-17-2021-n1281714

Use the graphs to find the stuff I talk about in the post. It'll be worth your time.

Some months back, when inflation came into the news again, I read an article by J.W. Mason, Mike Konczal and Lauren Melodia. The article pointed out that inflation figures are very often reported as "percent change from year ago" values. The article said that a year ago prices were down because of the pandemic and our response -- shutting down the economy.

As I recall, the article seemed to suggest that some higher price increases should be expected, to offset the lower price increases we saw a year ago. Sort of a balancing-out effect.

I didn't understand that at the time. But I didn't forget it. And I didn't reject it outright; and I do love to give examples of not jumping to conclusions on economic issues. And, yes, my mind does tend to wander.

But the other thing, the inflation is reported as percent change from year ago thing, that is a very important observation. Here, in red and blue, are two measures of the consumer price index. The dots are monthly. Each dot represents the change in the rate of inflation from a year before. There is a lot of overlap. Adjacent dots count a lot of the same inflation.

Graph #1: Two Measures CPI Inflation, showing Percent Change From Year Ago

I'm gonna say the last five dots of each line show inflation running high; and before that, the last one (blue) or two (red) show it rising. Before that, the dots show inflation "normal" or "low".

Notice that both the red and blue lines run low for about a year: from Spring of 2020 to Spring of 2021. And now that inflation has gone high, as Konczal et al said, we can expect it to stay high for about a year, even if price increases drop back to what they were in 2020. Why? Because as one new monthly low is added in to the change-from-year-ago, the oldest monthly low drops out of the calculation. Once a monthly value comes into the calculation, it stays in the calculation for a year. So inflation as shown here (percent change from year ago) can change little -- just as we now see little change since June 2021.

That big increase of March-April-May 2021? I'll get to that.

In the Spring of 2022, those rising numbers will start to drop out of the calculation: first March 2021, then April, and so forth; and at that point we may start to see a decline in the "from year ago" rate.

Now, I'm talking monthly numbers while we look at a "from year ago" graph. So let me show you the graph of monthlies. Same FRED data sets. But the vertical axis label is different. And the numbers are different:

Graph #2: Same Two Inflation Datasets, this time showing Percent Change from Previous Month

Note first of all that the Y-Axis values are much smaller on graph #2. On graph #1, normal inflation (see 2019) was around 2%, and the high numbers were around 4 or 5%. On #2, normal inflation is around 0.2%, and the high numbers around 0.8%.

If you take a year of normal months at 0.2% inflation, and figure each month as 0.2% on top of what came before, you get inflation a little over 2% for the year all told. So the numbers seem roughly right. (There is surely more error in my eyeball estimates than in the FRED data.)

Next, look at the sharp drop in the monthly numbers during the brief recession of early 2020. February marks the start of that recession and April marks the end. By June the number has bounced back up to "high normal" (similar to March and April 2019). And after that, the monthlies fall back to their normal range and stay there from August 2020 to February 2021.

During those same months, the first graph shows inflation running not normal, but low. Why? Because on the first graph, the low of March 2020 is included in the "from year ago" number until March of 2021. The low of April 2020 is in the "from year ago" number until April 2021. And the low of May 2020 is in the commonly reported number until May 2021.

 

Beginning in March of 2021, the three lowest numbers on graph #2 started dropping out of the graph #1 calculation. Beginning in April, the three highest numbers on graph #2 started being figured in. The result, visible on graph #1, was a big increase after March 2021. This is exactly the effect described by Konczal, Mason, and Melodia. The "percent change from year ago" measure of inflation was pushed unusually high because three unusually low numbers became more than a year old.

I'm not trying to make excuses. No inflation is good inflation. But figuring "from year ago" inflation is a good technique when you have inflation for several years running, as we had in the 1970s. Figuring inflation "from year ago" is not a good technique when you have big changes for short periods of time, as we had with the very brief covid recession and since that time.

The inflation we actually got in April, May, and June of 2021 had nothing to do with the inflation of a year earlier. The "from year ago" inflation reported for those months of 2021 was an artificially high number, because the numbers dropping out of the calculation were so extremely low.

[And since July, the "from year ago" inflation -- the commonly reported inflation -- has been running high because there were high numbers in April, May and June. That's the problem, the John Podhoretz problem. Read on.]

Now, if you got what I said so far, I can get to the point.

 

On Sunday, 17 October, on Meet the Press, Chuck Todd said

A post-Covid supply chain back-up has spread across the globe, causing cargo ship traffic jams, slowing delivery of goods and yes, driving up costs. In fact, those higher costs have helped feed a rise in prices all over the map, leading to the sharpest rise in inflation in 13 years.

He didn't say which measure of inflation, but they're all in the same neighborhood.

By the way, that "supply chain" story is some good bullshit, isn't it? 

During the show, John Podhoretz said:

I'd just say speaking of the economy though, this is all happening at a time of rising and apparently non-transitory inflation.

"Non-transitory" inflation. How the hell does he know that? Look at the second graph. Two months after June 2021, inflation was back in its normal range. That was August. September was normal or just on the high side of normal. With a little luck, this inflation scare could all be over by next month. "Non-transitory," he says.

Again, Podhoretz:

And we could be looking at inflation continuing to go up ...

People are in a mindless panic over what is, so far, mostly normal or near-normal inflation.

Or maybe they're not "in" a panic. Maybe they're trying to create a panic. 

Or maybe they just never thought about "from year ago" inflation versus the actual monthly numbers. Maybe they never considered whether the method that is very useful in a time of long-term inflation may be very flawed in a time of uncomfortably large, but surprisingly brief, upward and downward changes in the rate of inflation.

The worst thing would be for media people, reporting their concern as though it were news, to create among consumers a self-fulfilling concern that drives the rate of inflation higher and makes high inflation more long-lasting.