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09.27.21

Is Higher Inflation Here to Stay? Cleveland Fed Researchers Answer Your Questions

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Do you have “sticker shock?” Surprised by the recent surge in inflation? Even though inflation is running higher than usual, researchers at the Cleveland Fed say most likely it won’t last.

“Predicting inflation is not a perfect science, so no one can know for sure what will happen in the future,” say Economists Ed Knotek and Robert Rich, “but we think there are several reasons to believe higher inflation will not last.” They cite four reasons why they think the current high-inflation environment is temporary:

Inflation measurement – Because the typical way the inflation rate is calculated covers a 12-month period, changes in prices that happened many months ago will still affect today’s rate of inflation. Prices at the height of the pandemic were lower than they otherwise probably would have been and that’s why we see some of the big price jumps in products today.

Price increases are not broad-based – High inflation has largely been driven by a small number of items. For example, the increase in used and new car prices is related to the disruption in the supply of semiconductor chips for vehicles. These bottlenecks should eventually disappear. The increases in prices of other items, such as gasoline, airline fares, and lodging, are a sign of the economy’s normalizing more so than a longstanding inflation trend.

In addition, the researchers note longer-run inflation expectations, or what consumers, businesses, and financial markets think inflation will be in the future, have remained relatively stable. Also, as more people return to the workforce companies will be better able to keep up with demand for goods and services. As a result, conditions in the broader economy should improve.

Knotek and Rich provide more information, including links to Cleveland Fed data products and other resources, and answer questions posed online and at a recent inflation-focused webinar in Higher inflation: Temporary or here to stay?

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia. For more information, go to www.clevelandfed.org or follow us on Facebook, Twitter, Instagram or LinkedIn.

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