1. Sep 15, 2021 Inflation: is the high inflation temporary or will it become entrenched?

 Yesterday, the US Labor Department announced that inflation in the US (August 2020 to August 2021) was 5.3%.

Excluding the last few months, this is the highest in many years, and way above the target of 2%.

There are several explanations for the high inflation;

1. Shortages (of everything from microchips to olives - check this: Ford to Idle or Curb Output at More Plants Because of Chip Shortage, WSJ June 30 )

2. High freight prices

3. Shortages of workers, which lead to high wage increases

The question that economists (and politicians) are asking is whether the high inflation will stay, or whether this is a temporary blip, caused by the above factors which are, generally, temporary.

Economists surveyed by the WSJ predict inflation to fall to 2.5% in 2022 and 2.43% in 2023.

We will talk about more in the course. 

Two useful pieces of info for the course;

Measures of inflation

Apart from the regular inflation measure (5.3% in August), often refereed to, incorrectly, as CPI (inflation is a percentage change in CPI), there is Core inflation, which excludes the most volatile elements (food, energy) (4.1%) and trimmed mean CPI, which excludes the items that changed the most during the period (increased the most of fell the most): (3.2%)

Real versus nominal variables

Wage increases for the 25% lowest earning workers were 4.8% in August, the fastest increase since 2002. Good? No. This is the nominal wage: the number of dollars people get.

The real wage (i.e. how much the wage buys), which is the one that matters, has been falling.

(see WSJ, Sep 14, What’s Your Raise Really Worth? Inflation Has Something to Say About It. For the lowest-paid Americans, real wages—adjusted for rising prices—fell 0.5% in August from a year earlier).