The Case for Patience on Inflation

For now, anyway.

The Consumer Price Index was 0.94% higher in October than in September on a seasonally-adjusted basis. That’s the biggest monthly increase since June 2008. In fact, since 1982, there have been just three other times when the CPI rose at least that much in a single month: January 1990, September 2005, and June 2008.

That sounds bad, but it shouldn’t—yet—be a cause for policy action to restrain consumer spending. So far, the data still suggest that prices should stop spiking once (if?) the pandemic is brought under control globally.¹ A post-pandemic return to normalcy should give producers both the time and the ability to ramp up their output while encouraging consumers to shift their spending towards sectors that still have plenty of spare capacity.

The risk is that consumers and businesses start believing that even bigger price increases are coming in the future—and adjust their behaviors in response. That would eventually lead to hoarding, tightening financial conditions, less production, and shortages.

Fortunately, that doesn’t seem to be happening—yet.

A close read of the data so far suggests that the current price pressure is still confined to the same batch of idiosyncratic sectors that have been driving inflation all year. Moreover, measures of actual consumer behavior suggest that Americans are responding to higher prices not by hoarding in anticipation of even more inflation, but by postponing their spending in the expectation that affordability will improve.

Things might change—and if they do, I’ll tell you—but so far, people are behaving as if they believe that today’s disruptions are temporary and will end relatively soon.