Why 5.4% inflation isn’t a reason to panic

Inflation is high now, but why would it stay that way?

The US Consumer Price Index hit its highest point since 2008 today, reporting 5.4% year-over-year inflation and renewing concerns that the US recovery is driving up the cost of living at an unsustainable rate.

But inflation hawks still lack a clear narrative that explains how this high rate will become permanent. The debate over the pace of the US recovery and whether it is overheating the economy is driven by  an unusual set of circumstances—a strange, pandemic driven recession; an unprecedented government response; and a recovery proceeding at different paces in different places.

Seeing this price index exceed economists’ forecasts is a cause for concern, but I keep coming back to the question former Federal Reserve economist Claudia Sahm asked rhetorically in an interview a few weeks ago: “Explain to me where the persistent change, the structural change is going to happen so that we move from decades of either not being at 2% inflation or not being at full employment, [and] suddenly the whole world changes and we move decades back to 1970?”

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