Americans old enough to remember the United States' last experience with an extended bout of sharply rising inflation probably associate those days, in the late 1970s, with the 1979 oil crisis, which produced long lines of cars at gas stations and rationing in many states.
So there was a sense of déjà vu for many when the Department of Labor on Wednesday morning announced that annualized inflation had spiked by 4.2% in April, while a shortage of gasoline had Americans up and down the East Coast waiting in line to try to purchase dwindling stocks of fuel.
The headline-grabbing inflation number sent the stock market tumbling and the yield on bonds climbing as markets reacted — some would say overreacted — to news that the prices Americans pay for goods and services, from groceries to haircuts, are rising at the fastest clip in more than a decade.
Numbers can be deceiving
There are good reasons Americans shouldn't take the news as a warning that the country is headed back to the horrific 1970s "stagflation," of simultaneously rising unemployment and inflation combined with weak consumer demand.
Wednesday's gas lines were the product of a cyberattack on a key pipeline, not a signal of disruptions in the worldwide fuel supply. And the surprising 4.2% annualized inflation rate — experts had predicted a 3.6% increase — was misleading, because the month being used as the baseline, April 2020, was when the coronavirus pandemic shut down the U.S. economy.
While it is certain that prices are rising, and sharply for some goods, economists say that the overall cause is a mismatch between supply and demand driven by consumers emerging from a year-long lockdown and companies unable to immediately meet the increasing demand for goods and services.
"We have to step back and acknowledge that these are unprecedented times," said Mark Hamrick, senior economic analyst for Bankrate.com. "And just as the closing down of the economy in the face of the pandemic was unprecedented, and had unintended impacts, there are now unforeseen, but to some degree easily explained dynamics really causing all kinds of remarkable impacts on the economy, and inflation is one of them."
Even as he acknowledged that the inflation increase was "stronger than almost anybody had expected," David Wilcox, a senior fellow at the Peterson Institute for International Economics, added, "That said, I don't think my overall assessment of the inflation situation differs by very much at all today from what I thought yesterday. The dominant fact about inflation over the past dozen years or so, has been how incredibly stable inflation expectations have been."
U.S. inflation's global impact
The stability of inflation in the U.S. in recent decades — it hasn't risen above 4% since 1991 — has set the U.S. apart from many other countries, Wilcox said. That's particularly true with regard to developing markets, where double-digit inflation has not been uncommon over the same time frame.
Economists around the globe will be keeping a close eye on inflation numbers in the U.S., because if evidence of prolonged price increases appear, the Federal Reserve could take action, including by increasing interest rates.
On one hand, that could be bad news for some developing countries, because higher rates in the U.S. might trigger investors to shift assets. However, it would also signal a strengthening dollar and robust consumer demand for imported goods.
"Both of those factors are going to work together to cause the U.S. to be a strong destination for exports," Wilcox said. "It's a situation where, undoubtedly, there will be a little turbulence; it won't be a smooth adjustment process.
"But I don't think it's an adverse outlook for other countries. I think this is a fine outlook for other countries, particularly ones where their economic forward momentum is not as strong as the U.S. And in those countries, the U.S. is, in a sense, going to be able to lend a helping hand."
Fed appears unconcerned
U.S. policymakers, and particularly members of the Federal Reserve Board, have been working hard to tamp down inflation fears in recent days.
In a speech delivered the day before the Consumer Price Index (CPI) numbers were released, Federal Reserve Board Governor Lael Brainard played up the transitory nature of the current price increases and played down the likelihood of sustained inflation. The combination of pent-up demand and stimulus payments to consumers created a "tailwind" effect pushing the economy forward, she said, but when those are exhausted in the near future, it will have the opposite effect, reducing demand.
"There are compelling reasons to expect the well-entrenched inflation dynamics that prevailed for a quarter century to reassert themselves next year as imbalances associated with reopening are resolved, work and consumption patterns settle into a post-pandemic 'new normal,' and some of the current tailwinds shift to headwinds," Brainard said.
In another speech, delivered after the CPI data came out on Wednesday, Federal Reserve Board Vice Chair Richard Clarida reiterated the central bank's belief that "these one-time increases in prices are likely to have only transitory effects on underlying inflation, and I expect inflation to return to — or perhaps run somewhat above — our 2% longer-run goal in 2022 and 2023."
