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Larry Edelman

Have no fear: This inflation is temporary

As gas prices continue to rise, people filled up at a station in Brooklyn.
As gas prices continue to rise, people filled up at a station in Brooklyn.Spencer Platt/Getty

Close to 60 percent of people in the United States are under age 45 — too young to really remember the last time the cost of living got out of control.

That was near the end of the 1970s, when consumer prices spiraled so high that the only way to bring them down was for the Federal Reserve to jack up interest rates above 20 percent. The Fed succeeded, but the toll was a painful recession that threw millions of people out of work.

On Wednesday, the government released its latest report on inflation, and there were certainly some eye-popping price spikes. Used cars and trucks soared 21 percent in April over the previous year, washers and dryers were up 24 percent, and gasoline at the pump jumped 50 percent.

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Overall, the consumer price index, a widely watched inflation gauge, advanced 4.2 percent on an annual basis, the biggest year-over-year gain since 2008.

But this won’t be a repeat of that ‘70s show. There’s no need to cash out your retirement account and put everything into inflation hedges like gold or bitcoin. The Fed isn’t about to cut off the flow of cheap money that’s buoyed financial markets since the Great Recession.

Most people who study the economy for a living said that the sharp pickup in prices reported for April will last months, not years. Inflation will heat up as the economy takes off following the pandemic, they said, then settle back to a rate that’s higher, but actually healthier, than we’ve seen in a long time.

“This is transitory,” said Joel Prakken, chief US economist at IHS Markit. “Not only will these inflationary pressures abate, they will reverse.”

Last month’s surge was fueled by temporary factors: a burst of consumer spending following the easing of pandemic restrictions, and a shortage of some goods, especially computer chips, as suppliers struggled to keep up with exploding demand. Moreover, many of the price increases, in particular on energy products, were skewed in comparison with April 2020, when inflation was tamped down artificially by COVID shutdowns.

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This is good news! We are making up for lost spending, helped by those stimulus checks, and that’s pushing up prices for everything from airline tickets to restaurant meals to haircuts after demand for them dried up. The supply disruptions, though challenging, should ease in coming months.

Nonetheless, Wall Street is freaking out.

Investors erased more than $1 trillion in market value from US stocks on Wednesday, a drop of more than 2 percent in the Wilshire 5000 that was the steepest since February. Too much inflation is bad for stocks because it erodes the value of future profits and increases pressure on the Fed to boost interest rates.

“That’s the No. 1 risk our clients raise with us,” said Rhea Thomas, senior economist at Wilmington Trust. “Can the Fed keep the inflation genie in the bottle?”

How much inflation is too much?

If prices continued to climb by 4 percent into next year, it would almost certainly force the central bank to act.

Fed chairman Jerome Powell has said officials don’t plan to begin tightening credit at least until inflation exceeds 2 percent for a sustained run and the unemployment rate falls to where it was before the pandemic. (The jobless rate was 6.1 percent last month compared with 3.5 percent in February 2020.)

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Central bankers don’t think that will happen before 2024, and private forecasters mostly agree. They see the consumer price index expanding by about 2.6 percent over the course of this year and 2.2 percent in 2022 and 2023. Those estimates probably will move higher following Wednesday’s report, but not by enough to dramatically speed up the Fed’s plans.

Also not factored into forecasts is the potential impact of President Biden’s two big stimulus packages: $2 trillion for infrastructure and climate-change mitigation, and $1.8 trillion in aid to families, including free child care and community college tuition. If passed by Congress, spending of that magnitude would likely juice inflation.

On Wednesday, Republicans used the April inflation data as a warning, implying that big-spending Democrats were hurting ordinary Americans.

“Those numbers we heard today on inflation that should terrify every American, because it’s not a question of whether there’s going to be a tax increase, you just had the biggest tax increase you had in 10 years and it hit you already,” said House minority leader Kevin McCarthy. “And for those who have lower income, it’s getting hit harder.”

That may be good politics, but it’s lousy economics. McCarthy conveniently ignored the years of low inflation that kept goods and services more reasonable.

Listen instead to people like Thomas, the Wilmington Trust economist. She’s in the camp that doesn’t see inflation as a threat. But she’s keeping a close eye on wages, which are fairly stable, and housing costs, which are on a tear. Both are important drivers of inflation.

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On the other side of the equation, productivity gains and globalization are key trends to keep tabs on. Both work as a counterbalance to wage inflation.

And she’s tracking consumer expectations for inflation. That’s because if people think rising prices will be a problem, they will spend more now before they get even higher. That increased demand, in turn, can push prices up more.

“It’s a feedback loop that can be self-fulfilling,” Thomas said.



Larry Edelman can be reached at larry.edelman@globe.com. Follow him on Twitter @GlobeNewsEd.