Inflation is not the emergency

Consumer price inflation edged up some in September but is well below its highs earlier this year. We are not out of the woods yet, but it's not our biggest risk now.

Inflation is important. Prices at the pump are high which hurts. The cost of many things like cars, electronics, and home appliances are up too, if you can find them.

But, inflation is not an emergency.

It could have been, if Larry Summers had been two-thirds correct:

“I think there’s a one-third chance that inflation expectations meaningfully above the Fed’s 2 percent target will become entrenched, a one-third chance that the Fed will bring about substantial financial instability or recession in order to contain inflation, and a one-third chance that this will work out as policymakers hope.”

#PuffiSays, no Larry.1 The surge in prices is behind us. The monthly inflation is stepping down. We are not back to the level of inflation before Covid. WE ARE HEADED THAT WAY.

Inflation is down

The level of consumer prices is higher now than before Covid and is a burden on many families. (No paycheck is worse.) Prices surged in the spring of 2021 as the Covid cases fell dramatically, the vaccine rolled out, and people got back outside.

Fast forward to today, and surging prices are behind us. That’s a step back to normal. Monthly inflation—a better indicator of current conditions than year of year—peaked in June 2021. In September, inflation excluding food and energy, was back near its pre-Covid average. Total inflation is higher, but food and energy prices tend to be more volatile and, as result, often tell us less about where inflation is headed.

Supply chains and commodity prices remain a thorn in the side of consumers and businesses.2 As with jobs, progress is progress, even when it’s slower than we want.

Don’t forget consumer demand

Demand matters for inflation too. This year spring demand surged. In fact, in April and May of 2021, the highest percent of consumers, on net, said it as a good time to buy big-ticket durables since the crisis began. That coincided with the surge in inflation. Now that measure of demand is lower than the depths of the recession.

Again, it’s hard to see a spiral inflation taking hold when consumers are willing to wait it out until inflation settles down, as they expect it will.

We are not out of the woods

Inflation is not an emergency, but getting the pandemic under control is. At the start of the Covid economic crisis, I compared the pandemic to a Category 5 Hurricane that was holding over the entire United States for a few months. We know from severe hurricanes that they disrupt economic activity.

Source: Aladangady et al. (2021).

After hurricanes, policymakers know what to do. They get emergency aid to the hardest hit areas. That’s also how it worked in the spring of 2020 when Covid hit. But then Covid came back. Cases surged in the summer of 2020, again in the winter of 2020, and then most recently in the fall of 2021. Imagine how much damage Hurricane Ida would have done in Louisiana if it came six months after Katrina. And then again.

Source: New York Times.

Covid has turned out to be wave of after wave of Category 5 hurricanes laying siege to the United States and the world. Yes, we are learning the drill, as Fed Chair Powell said in August. Put masks back on, stay home (if you are privileged), stock up on toilet paper (inexplicably), and get angry at others how disagree with you about Covid. We know what to do, but we are exhausted. We lost over 700,000 Americans to Covid.

Wrapping up

Inflation is NOT spiraling out of control. It is coming down. Whether “transitory” is six months or twelve is NOT an emergency. It’s a pain in the ass for the Fed. The pandemic is an emergency. The heated debates in Congress about infrastructure, climate change, the child tax credit, health care, and affordable housing are extremely important too. Focus, people.

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To be clear in that same interview in March, I greatly underestimated how much inflation would pick up in 2021. (I also underestimated the destruction of the pandemic.) However, my point about inflation not spiraling up or even staying well above pre-Covid pace remains on track. Larry could still be right but two-thirds is far too high a probability. Also, it is NOT about who was right with their forecasts. It’s about getting out of this crisis as quickly as possible and policymakers making good decisions.


The outlook for inflation in the coming months in clouded by limited oil and gas production, as well as ongoing supply chain bottlenecks. The solution is vaccinating the world not the Fed raising rates.