At the Federal Reserve Chairman’s March 16 press conference, he announced that “we expect inflation to remain high through the middle of the year, begin to come down.” Prodded by reporters for more explanation. Chairman Powell acknowledged that “part of inflation coming down [in the Spring] is clearly to do with factors other than our policy, and those would include … certainly base effects [emphasis added] … When you look at a 12-month trailing window, you’re lapping very high inflation in March, April, May, June of last year. So, there should be some effects from that … in a 12-month picture. Really what we’re looking for, though, is month-by-month inflation coming down…. But a big part of it is, though, is the base effects I mentioned …”

Starting in March 2021, many prices that had frequently fallen for a year suddenly surged upward with the resumption of commerce and travel as the U.S. and other economies began a sustained reopening. Because monthly inflation rates peaked March to June of last year, in 2022 the year-to-year inflation rates this year will be calculated as the change from that base of unusually high prices.

The deflated base prices of March 2020 were a big part of the explanation of why the 12-month inflation picture only began to appear frighteningly high after March 2021. Conversely, as Chairman Powell warns, the high base of March to June 2021 is a “big part” of why year-to-year inflation rates are likely to appear to be coming down in those same months this year even if the “month-by-month inflation” is not coming down at all.