Ever since Federal Reserve Chairman Jerome Powell described cyclical or COVID-related elements of inflation as “transitory” (an ambiguous phrase now retired), critics repeatedly seized on year-to-year changes in price indexes as evidence that inflation was instead accelerating every month.
As I have noted before, however, the stubborn rise in year-to-year inflation—even when monthly rates slowed in the third quarter—was partly because of base effects (prices indexes were often flat or falling in the 2020 pandemic) and particularly because of compounding: If we keep adding the same monthly increase to a price index, the year-to-year change must keep moving higher. And adding new low-inflation months cannot quickly reverse the immobile 12-month average.
One especially important price, however, has always proved to be transitory (temporary) in the past—namely, large spikes in the global price of crude oil. As I documented last month, “year-to-year percentage changes in the CPI … invariably go up and down with year-to-year percentage changes in the price of oil. Higher oil prices also raise non-energy costs such as transportation” and energy-intensive goods.
Is that also true of the producer price index (PPI)? In a word, yes.
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