Looking at inflation as a “price phenomenon”

That´s what many analysts do, going into the details of price moves from pickles to trucks. The Fed many times falls into the same trap, but correctly restrains its “hiking impetus”:

“All participants expected inflation on a 12-month basis to move up in coming months. This expectation partly reflected the arithmetic effect of the soft readings on inflation in early 2017 dropping out of the calculation; it was noted that the increase in the inflation rate arising from this source was widely expected and, by itself, would not justify a change in the projected path for the federal funds rate.”

In fact, once the transitory statistical issue has cleared up, the CPI rates have gone back to where they were before, just fluctuating around 2%. In other words, nothing has changed in the economy, despite all the “frightening” stories of labor shortages, above trend growth and the like.

The charts show how inflation (understood as a sustained rise in the overall price level) can take off. In the early 1960s, inflation took off when the rate of NGDP growth was viewed as incompatible with a stable and low inflation rate. Throughout the 1970s, inflation continued to climb on the back of a rising trend in NGDP (nominal spending) growth.

At present, unless the Fed goes wild, putting nominal spending on a rising trend, inflation will remain low and stable. As I argued yesterday, following the crisis the Fed has, contrary to its assessment that monetary policy has been accommodative, been a restraining factor in the economy.

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