Economic Commentary on Inflation: Base Effects, Supply Chain Disruptions and Aging Populations

In this Issue:

  • Base Effects for Inflation: What Goes Up…
  • Supply Chains Are Tangled
  • The Impact Of Aging On Inflation

We have all experienced a regrettable moment after we’ve had too much of a good thing. A beachgoer revels in the sun but feels a burn for days; a thirsty runner drinks too much water and is slowed by cramps; happy hour blurs into a full night and begets a difficult morning. Moderation is usually the best course.

Inflation also is best kept at moderate levels. In the months ahead, however, measures of inflation are in for a wild ride, continuing the volatility of so many economic metrics throughout the COVID-19 crisis. But the coming excesses in price level readings are nothing to be alarmed about.

Economic data series have reached new highs and lows over the past year. For example, U.S. personal income experienced wild swings as the CARES Act’s fiscal measures put money directly in consumers’ pockets, then expired. As payments resume and unemployment supplements are renewed, the course of aggregate personal income will continue to look like a roller coaster.

Weekly Economic Commentary - 03/26/21 - Chart 1

The timing of comparisons is key. While inflation is calculated monthly, it is usually cited in terms of the index value’s change from a year before. That year-over-year measure is going to spike in coming months, as the initial months of the pandemic enter the calculation. (Economists refer to these as “base effects.”) Those months witnessed substantial volatility in the prices of key products, and complications in the process of collecting them.