Inflation Facts

Widely reported in the financial news, inflation skyrocketed in March–the Consumer Price Index was up 0.8% in just one month. Year over year, the inflation rate from March 2020 to March 2021 was 4.2%. Many people have told me they think those figures are understated from their own shopping experience, but I’m taking all my data for this post from the Bureau of Labor Statistics Consumer Price Index (CPI).

What can we expect, looking ahead? From March to December of 2020 the CPI was up 1.6%, which means that if the CPI rises 1.6% for the rest of this year, inflation at year-end will be 4.2%. There’s a good chance that inflation for the remainder of the year will be higher than that, in which case even 5% inflation for 2021 would be a conservative estimate.

Looking at the table linked above, you can see that in most years inflation tends to run higher in the first half of the year compared to the last half, which weighs against my inflation prediction in the previous paragraph. But inflation was dampened last year by a reduction in consumer demand due to the COVID pandemic, and is likely to accelerate this year as the pandemic subsides and consumer demand picks up again. That’s what we saw in March. So I’m expecting more inflation.

Then there is the easy money policy of the Federal Reserve (Fed), which may be politically difficult to reverse. Adding to pressure on the Fed is the huge federal budget deficit which is pushing the Fed to buy government bonds, which creates money. In the 1960s and 1970s the Fed was very accommodating with its monetary policy, but shifted gears in the 1980s to focus on reducing inflation. The Fed’s policy has reversed in the twenty-first century, it appears that the negative consequences are starting to appear.

The inflation rate for all of 2020 was 1.4%, but that’s deceiving because of the big drop in prices due to the pandemic. The inflation rate from February 2019 to February 2020 was 2.3%, so at that point inflation was already picking up and was only temporarily delayed by the pandemic economy. I will be surprised if this year’s annual inflation rate is less than 5%. Look for more inflation ahead.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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