Economic Commentary: Inflation's Past, Present and Future

This week, our local grocery store began offering customers a free bottle of hand sanitizer with every $5 purchase. What a difference a year makes; a year ago, panicked shoppers were ransacking store shelves in pursuit of that same item.

That experience got me thinking about how inflation evolves during periods of stress. In the case of hand sanitizer, anxiety initially created shortages and hyperinflation; as time passed, oversupply caused the price to crash. The opposite was true for hotel rates. We are currently seeing these kinds of roller coaster rides in the prices of many different goods, making it difficult to get a fix on their long-term trajectories.

Given the frequency and intensity of recent discussions around American inflation, we are devoting this week’s commentary to examining the issue from a number of angles. Our conclusion remains that many of the signs of inflation in the current data are fleeting. While inflation risk is growing, it is manageable.

Our main messages:

  • A handful of data points does not make a trend. Bursts in some prices coming out of the pandemic were very much expected, but those prices are unlikely to continue upward at the pace seen in recent months.
  • The relationship between growth in the money supply and inflation has diminished substantially in the last 40 years, and has turned negative during the last 10. So it isn’t clear that easy monetary policy will produce high inflation.
  • Recent focus has been on exaggerated prices for certain goods. But the U.S. economy is more than two-thirds services, and service price inflation remains well-behaved.
  • Globalization and technology have been important governors on inflation during the past generation. While globalization may advance more slowly in the years ahead, technology is likely to gather pace.
  • Inflation expectations are within acceptable ranges. This is important, as expectations are a key determinant of actual inflation.
  • With un- and underemployment still elevated, aggregate wage growth is unlikely to move to a higher plane. Pricing power in most cases remains limited. These topics are addressed in special sections of this commentary.