Grumpy Economist: Three kinds of inflation
The latest inflation data is released, which rose by 0.64% from April to May (annualized 7.7%), higher than 0.77% from March to April (annualized 9.2%). . In order to resolve basic disputes, I like to plot the level of CPI:
The graph shows that the “reinflation” caused by last year’s pandemic recession has ended, we have returned to normal growth, and now we have started something new.
Inflation is not the same everywhere. For another purpose, I decompose inflation into durable goods and services.
Until around 1985, these three categories moved together. After that, we saw sharp differences. Inflation depends on what you buy. Services have become more expensive, and durable goods have actually become deflationary. The forces are very familiar. The increase in skill premiums means that people are becoming more expensive, some of which also reflect rising costs for companies such as healthcare and universities, which may be more related to government payments. Durable goods have become cheaper, thanks to China, but they have also become better. The decline in CPI reflects quality adjustments rather than lower prices. (Non-durable goods and housing behave like average, so I didn’t show them.)
Not all inflation is the same, what you experience depends on what you buy and where you buy it.
Now let’s get to the main topic: Where does the current surge in inflation come from? I reset the CPI to 2018 and it is now. Not surprisingly, the current surge in inflation is focused on durable goods. Durable goods rose 3% from April to May, with an annualized rate of 36%, higher than the 3.52% from March to April! Interestingly, others are also on the rise, but not so spectacular. It is also interesting that the sharp drop in the pandemic has been in non-durable goods. This is all common sense. The prices of bars and restaurants have fallen during the pandemic, and the prices of TVs and fitness equipment have fallen. “Things” are now really hard to find and produce.
As Tyler Goodspeed points outThis kind of inflation has erased the real value of recent nominal wage increases.
(For analysis, the “Inflation” tab has several posts on this topic recently.)