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Three inflations

 The latest inflation numbers are out, up 0.64% from April to May (7.7% annualized), on top of 0.77% (9.2% annualized) from March to April. . To get around…

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 The latest inflation numbers are out, up 0.64% from April to May (7.7% annualized), on top of 0.77% (9.2% annualized) from March to April. . To get around the base controversy, I like to plot the level of the CPI: 


The graph suggests that  "reflation" from the pandemic recession was over last year, we had been back to the usual growth, and now we're embarked on something new. 

Inflation is not the same everywhere. For another purpose I broke inflation down to durable goods and services. 


Until about 1985, the three categories moved together. After that we saw a sharp divergence. Inflation depends on what you buy. Services got much more expensive, while durable goods actually saw deflation. The forces are familiar. The rise in skill premium has meant that people got more expensive, and some of that reflects also the rise in cost of businesses such as health care and universities which may have more to do with government payment. Durable goods got cheaper, thank you China, but also they got a lot better and the CPI decline reflects quality adjustments rather than lower sticker prices. (Nondurables and housing behave a lot like the average, so I don't show them.) 

Not all inflation is the same, and what you experience depends on what you buy and where you buy it. 


Now to the point: Where is the current surge in inflation coming from? I rebased the CPIs to 2018, and here they are. No surprise, the current surge of inflation is concentrated in durables.  Durables went up 3% April to May, a 36% annualized rate, on top of 3.52% March to April!  The others are rising too, interestingly, but not as spectacularly. It's also interesting that the big decline in the pandemic was among nondurables. This is all common sense. Bar and restaurant prices went down in the pandemic, less so TVs and gym equipment, and "stuff" is now really getting hard to find and to produce. 

As Tyler Goodspeed points out, this inflation has wiped out the real value of recent nominal wage gains.

(For analysis, the "inflation" tag has several recent posts on the topic.) 

 

This article was originally published at https://johnhcochrane.blogspot.com/2021/06/three-inflations.html