With a widespread surge in power and energy costs, the global inflation trend is extending. This follows the earlier synchronous exponential rise in prices of commodities amid post-COVID recovery and persistent supply chain bottlenecks. Thus, measures of inflation expectations across the world are on the rise.

Overall, prices climbed 6.8% year-over-year, the largest increase since June 1982, and rose 0.8% over the past month. Higher prices were “broad-based,” per the Bureau of Labor Statistics (BLS), with substantial increases seen in the indexes for gasoline, shelter, food, and new and used vehicles.

 The gasoline index alone rose 6.1% in November. Of course, those items are key to the basic financial life of normal Americans, thereby stretching their bottom line even thinner.

Prices rose by 0.5% in November, slightly less than the month prior, and climbed by 4.9% over the last 12 months. That’s well above the Federal Reserve’s 2% target, although the Fed prefers a different inflation gauge, PCE inflation.

Consumers are seeing prices rise sharply for a variety of goods and services because of persistent supply and labor shortages and strong demand.

Stoked by imbalances in the economy created by the Covid-19 pandemic, inflation is one of the most vexing problems facing economists and government policymakers—from Federal Reserve officials, who set interest rates, to the Biden administration and Congress. 

Inflation is the rate of change of overall prices in the economy. The “headline” inflation rate is the rate of change of a basket of goods for a “typical” urban consumer. An alternative is the “core” inflation rate that strips out the prices of foods and fuels since these tend to be more volatile than other prices and, also, they can reflect factors other than the strength of the economy and the extent to which the economy is “overheating.”

One striking aspect of inflation trends over the past 50 years in the U.S. is that inflation has been much lower since the mid-1980s and, even more so, since the onset of the Great Recession — to the point of raising concerns that inflation was too low. Over the last decade, inflation has averaged only 1.7%. Contrast this with the 1970s when headline inflation averaged 7.5%, or even the period from 2000 to 2008 when inflation averaged 2.6% (see chart). 

Inflation has been rising over the past year, but this comes after especially low inflation in the immediate wake of the onset of the pandemic. The inflation rate for the 12 months ending in  November 2021 was 6.8%. At the start of the pandemic, the economy actually experienced price decreases, so the increase in prices seen since April 2020 was initially, to some extent, a catch-up in prices as the economy recovered from the pandemic. However, the price level has now overshot the trend previously set.

Inflation — both actual and expected — matters. Inflation makes it harder for consumers and workers and firms to distinguish between relative and general price changes.

It also makes it more difficult to make plans for saving and investment. And, higher expected inflation raises borrowing costs for the government (although higher actual inflation erodes the real value of government debt). Finally, the Fed tends to respond to higher inflation by tightening monetary policy, which depresses economic activity.

Hence, the stakes are high for avoiding a sustained acceleration in inflation. So far, inflation has risen in a halting fashion but remains more persistently high than previously anticipated. Near-term expectations of inflation have risen, but remain relatively muted – particularly amongst economists — either because the anticipated output gap or the responsiveness of inflation to the output gap are thought to be small, longer-term inflation expectations remain well-anchored, or all three. 

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