Is the inflation temporary or here to stay? Things to learn from the latest CPI Report.
Inflation in April accelerated at its fastest pace in more than 12 years as the Consumer Price Index or CPI rose 4.2% from a year earlier. The month-to-month gain was 0.8%.
Although inflation is not a simple phenomenon to interpret, there are a few things we can learn from the latest CPI Report.
- The ever-volatile food and energy are big drivers of the rise: The general CPI rose 4.2% in April but excluding the ever-volatile food and energy prices, which was 3%.a
- The rise of digitalization and automation was a potent dynamic influencing inflation.
- The pandemic and lockdown.
How does the inclusion of food and energy prices cause the general prices to surge?
Supply shocks, such as – fluctuations in the oil supply from the OPEC cartel or environmental factors ravaging crops, affect the prices of these products. The prices of food and energy items are more likely related to temporary factors, which may change later. The changes in these item’s prices are not necessarily a sign of inflation, and when included, they are capable of distorting a trend increase in general prices. For this reason, core inflation is measured, which enables economists to isolate what is happening to general prices without distraction from spikes in volatile food and energy prices. Leaving out the volatile categories yields a more steady measure of inflation.
Including volatile categories may trick the economists into believing that general prices are rising.
How does the rise of digitalization and automation affect inflation?
Digitalization and automation have a dampening effect on inflation. By adopting digitalization and smart robots, companies are relentlessly driving down labour costs. This way, companies can maintain profits and even cut prices. Drones, self-driving trucks, and apps powered by Artificial Intelligence are lowering the delivery costs too. These factors contribute to low inflation.
The effect of pandemic and lockdown on inflation.
The month of April last year was a large down month as several shops were closed, and people were required to stay in their homes. Goods shortages contribute to the rise in inflation. For instance, pre-owned cars have long been a factor in controlling the general car-buying financial burden on U.S. consumers, but as travel became restricted, car rental companies, which have been a major contributor to the used-car sales inventory, reduced their supply to the used car dealers.
The reduced supply caused the prices to soar, but as things get back to normal and the used car market restores, the imbalance will be gone, and the prices will come back to normal.
For these reasons, we can say that inflation is not here to stay for a long time. Indeed, President Biden’s spending initiatives to counter the effects of the pandemic will elevate CPI to some extent, but that won’t last forever.