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“The annual CPI figure surged to 4.2%, the most since 2008 though a figure distorted by the comparison to the pandemic-depressed index in April 2020. This pheno

“The annual CPI figure surged to 4.2%, the most since 2008 though a figure distorted by the comparison to the pandemic-depressed index in April 2020. This phenomenon -- known as the base effect -- will skew the May figure as well, likely muddling the ongoing inflation debate.” We’re coming off of years of missing the 2% inflation target, combined with a pandemic that crashed everything through the floor. Seems like we have some room to let the economy re-open and wait for supply chains to settle out, before the Fed moves in and crushes things to give us another five years of missed inflation targets.

jerf 6y ago
Yeah, I don't think the "base effect" is relevant here. These aren't employment percentages or something. Inflation is cumulative. How low or high it was last year isn't really relevant; 4.2% is simply high, full stop. I don't care if it's an "improvement" from 20% last year, it would still be high. I don't care if it was 1% last year, it would still be high. Comparing it to last year might be relevant for other things, of course, but it's not at all the "base effect" where a company claiming 30% growth year-over-year isn't really getting 30% because there's just a "base effect" of seriously depressed revenue last year... 4.2% inflation is just 4.2% inflation, full stop.
- JumpCrisscross 6y ago
  > 4.2% is simply high, full stop. I don't care if it's an "improvement" from 20% last year, it would still be high Big part of that is gasoline and cars, both of which had non-monetary supply chain issues. Oversimplifying monetary policy is nice for dinner tables and political grandstanding. That is why independent central banks have the track record they do.
  - imtringued 6y ago
    The problem with the usual more money = more inflation argument is that you would have to restrict yourself to a certain subset of the monetary supply that is relevant to inflation but everyone wants to talk about the broadest definition of monetary supply that also encompasses a subset that is completely irrelevant to inflation.
- MagnumOpus 6y ago
  The base effect is relevant. The consumer price index is 267 right now, 256 a year ago and 255.5 two years ago. So the average inflation over two years is 4.5% or 2.2% annualised -- a quite normal pace of price inflation. The main reason why inflation was near-zero in 2020-04 and too high in 2021-04 is oil prices dropping from $70 to $0, and then recovering back to $70, with the corresponding effects on gasoline prices. Had oil prices staid stable at $70, year-over-year CPI figures would have fluctuated much less and would now be 1-2 percentage points lower. That is the base effect.
  - jerf 6y ago
    When a company in 2021 reports revenue growth of 30%, it's not really 30% growth, with all the conclusions about the company you'd normally come to based on that data, and calling "base effect!" on it is reasonable. The number has no real use. This inflation is real. The base effect doesn't make it less real. Prices have really gone up, in the relevant time period. Your choice to average it out across a particular two year window isn't invalid on its own terms, but it starts raising a lot of other questions about which years you pick and how much data massaging you can do by picking your choice of start and end and all that other sort of stuff, and it produces numbers that may also be real, but are different numbers. By contrast, if the company reports absolute revenue in 2021, the base effect does nothing to that number. The revenue is the revenue. Likewise, the inflation measurement is perfectly valid. Inflation, as defined by the measure (since by no means would I claim that it's somehow the only option or the objectively best option) really is what it is. What conclusions you come to based on that, well, we'd be arguing about that regardless of whether there's a "base effect" or not anyhow. But I'm generally underwhelmed by argumentation that appears to be trying to explain away, rather than explain. Start with the brute facts and move out from there, rather than immediately cutting to trying to argue away the brute facts. (To be clear, I'm not making any particular implicit argument. I don't currently have a solid opinion on this matter; it is still a fairly large range of possibilities to me. In general, usually some space and time is needed to even begin to "explain" any economic fact.)
    - matthewdgreen 6y ago
      The question is not what you call it, but what you do about it. If we had a temporary pandemic-induced price crash and then everything returned to pre-pandemic normal, then the answer is probably "not much". But some people are concerned that this is the start of a crisis and want the Fed to raise interest rates. Deciding between those two very different policy outcomes is the important thing here, not quibbling about semantics.
listenallyall 6y ago
> "crushes things" LOL, a 50 or even 100 BP rate hike (neither of which is in the current realm of possibility) would be a minor speed bump, it certainly wouldn't "crush" anything. Most long treasury yields could double and they would still be well below historical averages. https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart https://www.macrotrends.net/2521/30-year-treasury-bond-rate-...
- lumost 6y ago
  Given the increased debt loads on most projects, a 100 bps increase from ~0% to 1% could have just as much impact as a 100 bps increase from 5->6%. In fact the effect may be larger as a 0.25% -> 1% increase is a 4x relative increase in interest rates vs. a 20% increase. It's possible that the only way out of the current situation is a steady inflation which reduces the nominal debt load.
  - deleted 6y ago
    [deleted]

jerf 6y ago

Yeah, I don't think the "base effect" is relevant here. These aren't employment percentages or something. Inflation is cumulative. How low or high it was last year isn't really relevant; 4.2% is simply high, full stop. I don't care if it's an "improvement" from 20% last year, it would still be high. I don't care if it was 1% last year, it would still be high. Comparing it to last year might be relevant for other things, of course, but it's not at all the "base effect" where a company claiming 30% growth year-over-year isn't really getting 30% because there's just a "base effect" of seriously depressed revenue last year... 4.2% inflation is just 4.2% inflation, full stop.

JumpCrisscross 6y ago
> 4.2% is simply high, full stop. I don't care if it's an "improvement" from 20% last year, it would still be high Big part of that is gasoline and cars, both of which had non-monetary supply chain issues. Oversimplifying monetary policy is nice for dinner tables and political grandstanding. That is why independent central banks have the track record they do.
- imtringued 6y ago
  The problem with the usual more money = more inflation argument is that you would have to restrict yourself to a certain subset of the monetary supply that is relevant to inflation but everyone wants to talk about the broadest definition of monetary supply that also encompasses a subset that is completely irrelevant to inflation.
MagnumOpus 6y ago
The base effect is relevant. The consumer price index is 267 right now, 256 a year ago and 255.5 two years ago. So the average inflation over two years is 4.5% or 2.2% annualised -- a quite normal pace of price inflation. The main reason why inflation was near-zero in 2020-04 and too high in 2021-04 is oil prices dropping from $70 to $0, and then recovering back to $70, with the corresponding effects on gasoline prices. Had oil prices staid stable at $70, year-over-year CPI figures would have fluctuated much less and would now be 1-2 percentage points lower. That is the base effect.
- jerf 6y ago
  When a company in 2021 reports revenue growth of 30%, it's not really 30% growth, with all the conclusions about the company you'd normally come to based on that data, and calling "base effect!" on it is reasonable. The number has no real use. This inflation is real. The base effect doesn't make it less real. Prices have really gone up, in the relevant time period. Your choice to average it out across a particular two year window isn't invalid on its own terms, but it starts raising a lot of other questions about which years you pick and how much data massaging you can do by picking your choice of start and end and all that other sort of stuff, and it produces numbers that may also be real, but are different numbers. By contrast, if the company reports absolute revenue in 2021, the base effect does nothing to that number. The revenue is the revenue. Likewise, the inflation measurement is perfectly valid. Inflation, as defined by the measure (since by no means would I claim that it's somehow the only option or the objectively best option) really is what it is. What conclusions you come to based on that, well, we'd be arguing about that regardless of whether there's a "base effect" or not anyhow. But I'm generally underwhelmed by argumentation that appears to be trying to explain away, rather than explain. Start with the brute facts and move out from there, rather than immediately cutting to trying to argue away the brute facts. (To be clear, I'm not making any particular implicit argument. I don't currently have a solid opinion on this matter; it is still a fairly large range of possibilities to me. In general, usually some space and time is needed to even begin to "explain" any economic fact.)
  - matthewdgreen 6y ago
    The question is not what you call it, but what you do about it. If we had a temporary pandemic-induced price crash and then everything returned to pre-pandemic normal, then the answer is probably "not much". But some people are concerned that this is the start of a crisis and want the Fed to raise interest rates. Deciding between those two very different policy outcomes is the important thing here, not quibbling about semantics.

listenallyall 6y ago

> "crushes things" LOL, a 50 or even 100 BP rate hike (neither of which is in the current realm of possibility) would be a minor speed bump, it certainly wouldn't "crush" anything. Most long treasury yields could double and they would still be well below historical averages. https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart https://www.macrotrends.net/2521/30-year-treasury-bond-rate-...

lumost 6y ago
Given the increased debt loads on most projects, a 100 bps increase from ~0% to 1% could have just as much impact as a 100 bps increase from 5->6%. In fact the effect may be larger as a 0.25% -> 1% increase is a 4x relative increase in interest rates vs. a 20% increase. It's possible that the only way out of the current situation is a steady inflation which reduces the nominal debt load.
- deleted 6y ago
  [deleted]