Is Inflation Here to Stay? Price Rise Nears a 30-year High

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A gas sign in Maui, Hawaii, where prices are nearing $5 a gallon. (Mike Blake/Reuters)

OK. So I will admit it. I finally have a touch of inflation fever. But it’s just a touch. Sniffles.

The government reported the Consumer Price Index, the most important monthly gauge of inflation, on Friday for March and it showed that inflation is rising at the fastest pace in more than a year. On average, prices are up 2.7% in the past 12-months. But if you take the past four months alone, prices are on pace to rise nearly 6% a year. That’s the fastest jump for inflation in nearly 30 years. The last time inflation topped 6% was in 1982.

So why don’t I have a full-blown case of inflation fever? Here’s why:

The main culprit, probably unsurprisingly to anyone who drives a car, in pushing up inflation is gas prices, up an amazing 28% in the past year. Food prices were up, as well, but not nearly as much, just 2.9%. Take away food and energy, and inflation was basically non-existent in March, up just 0.1%. By that measure inflation is on pace to be up just 1.2% in the next year, which is among the lowest rates of price increases in decades.

The Federal Reserve gets routinely criticized for making its policy decisions on this later figure of inflation, which excludes food and energy and is called core inflation. The rebuke is that, yes, there’s no inflation as long as you don’t have to eat anything or drive anywhere. Actually if you buy anything that is shipped, what you pay is likely to somewhat be affected by the price of gas. The question is to what point and how long?

The Fed looks at core inflation because it’s usually a better indicator of where prices are headed. That’s why it’s fair, even though it might seem absurd that the inflation gauge the Fed favors excludes the basic things that everyone has to buy. Spikes in food and energy just don’t seem to translate into overall price increases. The reason is gas price and food price increases, at least big jumps, tend not to last that long. And when they do, overall inflation usually drops quickly.

But what if the recent rise in oil, food and commodities in general doesn’t go away anytime soon. At least for food prices, I buy the argument that a growing, richer world population could keep food prices high for some time. Oil could be the same story. Then I think we may end up having an inflation problem. Indeed, some think high gas prices are already dragging down the economy. I haven’t done it, but I would bet that if you lengthen the time period on David Leonhardt’s graph from his NY Times econ blog in the link above you would find that the inflation figure that includes gas would do a better job of predicting coming inflation in periods when energy prices are rising steadily. So the question for inflation is are we in one of those periods or not. To be sure, gas prices have risen a lot recently. But whether that rise will continue is yet to be seen.

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