Kyle’s Chart of the Week
Will inflation ease on its own as we move on from the pandemic?
One question that has been on the minds of both consumers and investors is when, and if, the inflation we’ve experienced since the onset of the pandemic will come down. This has led to a discussion of whether this increase in inflation is more structural (related to monetary policy) and will be more persistent, or transitory (related to short-term supply and demand disruptions) and will be short lived.
The Federal Reserve Bank of San Francisco has a good way of exploring these differences by dividing the Core Personal Consumption Expenditures Price Index, known as Core PCE, into two components: (1) COVID-insensitive and (2) COVID-sensitive. They define COVID-sensitive as categories where “prices or quantities moved in a statistically significant manner at the onset of the pandemic, between February and April 2020”, while COVID-insensitive includes all other categories. The chart below shows how much each component contributed to inflation, where green represents COVID-insensitive categories and blue represents COVID-sensitive categories.
Based on this chart, we can see that since the shock of pandemic shutdowns the COVID-insensitive component (green) slightly increased while the COVID-sensitive component (blue) greatly increased. Thus, increase in inflation since that time is much more attributed to contributions from COVID-sensitive price increases than COVID-insensitive price increases. This chart illustrates that, as crazy as it may seem, it’s still possible for inflation to ease back to normal levels as we move on from the disruptions caused by the pandemic.
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