What does current inflation tell us about the future?

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What signal should we be taking from current inflation for future inflation? The answer: some signal, but not a lot. To be sure, inflation is running high (figure 1); and, after excluding the typically volatile categories of food and energy prices, is running higher than it has been in decades. But because the factors that are leading to inflation are pandemic-related and therefore temporary, the current trend does not forecast the future.

To examine whether this short-term run up in inflation points to higher inflation in the years ahead, I look at the factors that appear to be contributing. I find that the strength and composition of consumer demand for goods since the pandemic began as well as supply constraints caused by the pandemic are the sources of the current spike. The clearly temporary nature of those factors suggests we should not extrapolate recent inflation pressure into the future.

Key Points:

  • Goods inflation has indeed been…

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