from EconoFact (update of May 2021 version):
Key points:
- Before the pandemic, inflation had been relatively low for about 30 years, and Very quiet In the past ten years.
- The inflation rate has been rising for the past year, but this happened after a particularly low inflation rate immediately after the pandemic broke out.
- In order to consider whether inflation is likely to continue to maintain high interest rates, it is important to study the different factors that lead to a general increase in prices. Economists’ preferred explanation of inflation, sometimes called the “expectation enhancement Phillips curve,” focuses on a certain combination of three factors: slack, expectations, and input costs.
- How much slack is the economy?
- Economists and families are marking their Inflation expectations In the following year-despite differences in opinions between the two groups. Although from a relatively long-term perspective, the financial market expects that inflation will only accelerate slightly in the next five years.
- Will input costs continue to rise?
- Will labor costs continue to rise?
- Will too much money chasing too few commodities cause inflation?
From “what does it mean”
Inflation-actual and expected-are both important. Inflation makes it more difficult for consumers, workers, and companies to distinguish relative price changes from general price changes. This also makes it more difficult to formulate savings and investment plans. Moreover, higher expected inflation will increase the government’s borrowing costs (although higher actual inflation will erode the real value of government debt). Finally, the Fed tends to respond to rising inflation by tightening monetary policy, which will curb economic activity. Therefore, the risk of avoiding a sustained acceleration in inflation is high. So far, inflation has risen in a stagnant manner, but it is still higher than previously expected. Inflation expectations have risen recently, but they are still relatively moderate—especially among economists—either because the expected output gap or the response of inflation to the output gap is considered small, long-term inflation expectations remain stable, or all Three.
For a discussion of expectations, see this postal.
For a discussion of alternative measures to inflation, please refer to this postal.
For a discussion on the role of the difference between goods/services and the role of housing costs, please refer to this postal.
Economic facts Alternative ways to measure inflation during a pandemic here (Cavallo & Kryvtsov), on food price inflation here.
