Consumer prices in the United States continued to rise in October, as inflation hit a 31-year high. The Consumer Price Index for All Urban Consumers (CPI-U) was up 6.2 percent compared to a year ago, while the core index excluding more volatile food and energy prices surged by 4.6 percent from October 2020 levels. Those were the highest readings since November 1990 and August 1991, respectively, fueling inflation fears that had long been downplayed.
When inflation spiked in the spring/early summer of this year, it was largely due to the so-called base effect, caused by the pandemic’s cooling effect on consumer prices a year earlier. At the onset of the pandemic, prices had taken a dive due to a sudden drop in consumer spending and fuel demand before slowly climbing back to their pre-pandemic trajectory over the summer and fall. Due to that initial dip in consumer prices, year-over-year comparisons were always going to be exaggerated this year, as last year’s prices were unnaturally low.
So are inflation fears justified or is it still too early to ring the alarm bells? Back in April, the Federal Open Market Committee said that it was going to aim for "inflation moderately above 2 percent for some time" before raising interest rates to achieve a long-term average of 2 percent inflation. And while it’s unclear how the committee defines “moderately above” and “for some time”, its long-term goal of 2 percent inflation is clear.
To eliminate the short-term effects of the pandemic, we calculated the average annual inflation rate over a moving three-year period, yielding a curve that fluctuated around 2 percent for a long time, until it took off this summer. In October the three-year average inflation rate hit 3 percent, indicating that the latest spike in consumer prices is more than just a statistical blip and should be taken seriously.