Traffic jam on a freeway in Los Angeles, California.Mario Tama / Getty Images
Should President Biden shelve his program because Americans are rushing to buy second-hand cars?
Okay, I'm being a little sarcastic, but just a little.
That's pretty much what economists trying to draw big conclusions from the inflation report released Wednesday by the Bureau of Labor Statistics say.
It is true that, while most expected a rise in consumer prices, the current rebound is being greater than expected.
The year-on-year inflation rate has exceeded 4%, up from the previous peak, in 2011. It is not absurd to wonder if unexpectedly high inflation means that the economy has less room to move forward than the Biden Administration and the Federal Reserve had expected. course;
It could be true, and if so, perhaps Biden's spending plans will prove excessive and the Federal Reserve will soon have to consider raising interest rates.
Inflation in the US rebounds 4.2% in April, the highest since 2008
But neither the details of the report nor recent history support those concerns; on the contrary, they indicate that politicians should remain calm. This does not seem at all a reproduction of the stagflation experienced in the 1970s; it appears to be a temporary incident, reflecting transitory turmoil as the economy struggles to recover from the shocks of the pandemic. And history tells us that it is a very bad idea for politicians to panic at these spikes. To understand why, let's remember what happened in 2011, the last time we observed this type of inflationary deviation. Between the end of 2010 and the beginning of 2011 there was a sharp rise in consumer prices, driven by the increase in the prices of oil and other raw materials,at a time when the world was recovering from the 2008 financial crisis. Consumer price inflation reached 3.8%, slightly below the latter index.
And the inflation hawks went wild. Representative Paul Ryan (remember him?) Cold to questions Ben Bernanke, chairman of the Federal Reserve, about his expansionary monetary policies, with the slogan that "the most harmful thing a country can do to its citizens is devalue the currency ”. However, Bernanke was not intimidated. The Federal Reserve focused on “core” inflation, a measure that excludes volatile food and energy prices, and which (rightly) considers to give a more accurate picture of core inflation than headline inflation. And the cool head of the Federal Reserve was justified: inflation fell quickly and the dollar did not devalue.
Politicians elsewhere were not so rational. Like the United States, the euro zone experienced a spike in the consumer price index, but not in core inflation. However, the European Central Bank panicked. It raised interest rates despite very high unemployment, and by doing so it worsened the continent's severe debt crisis.
The lesson of 2011 is twofold. First, we must not overreact to short-term fluctuations in inflation. Second, when there is a sharp rise in prices, let's look at the details: does it look like a rise in core inflation, or does it look like a deviation caused by temporary factors? Which brings us to last month's price hike. Does it seem like something to worry about? No the truth is no. It is true that if this time we focus on the usual definition of core inflation and exclude food and energy, the story does not change much. Over the past 12 months, core inflation was 3%, not much lower than total inflation; and only in April, core inflation was slightly above headline inflation.
But some economists have been arguing for some time that price changes over the next few months are likely to be inflated by temporary factors that conventional measurements of core inflation do not take into account. A month ago, I warned that "we were going to have a strange recovery", with "an unusual series of bottlenecks" that will cause "many temporary spikes in prices other than food and energy."
And of course, April prices were largely driven by peculiar factors obviously related to the reactivation of the economy. When people talk about underlying inflation, they rarely have the price of second-hand cars in mind; And yet the 10% monthly increase in the price of used cars - partly because citizens are ready to travel again, and partly because a shortage of computer chips is affecting the production of new cars - explains a third of April inflation. There was also a 7.6% rise in the price of "accommodation outside the home", because they travel again.
And there are also the "base effects": a year ago, many prices fell because much of the country was confined, so that the simple return to normality had to look like a temporary increase in inflation. The White House calculations correcting for these effects show considerably more contained inflation. These arguments in favor of discounting short-term inflation figures are not ex post excuses. I wrote about bottlenecks and temporary detours a month ago; and around the same time, White House economists warned of misleading base effects. What we are seeing is what we expected to see, only to a slightly greater extent.
This does not mean that the entire Biden economic program is going well.
It may indeed end up being overly ambitious.
But the most recent figures, both in terms of inflation and employment, tell us nothing about whether or not that is true.
is a Nobel Laureate in Economics.
© The New York Times, 2021. News Clips translation.