Is inflation merely catching up? – The Property Chronicle
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Is inflation merely catching up?

The Macro View

Everyone is talking about inflation. And rightly so. The consumer price index (CPI) grew by 5.4% from June 2020 to June 2021. That is a far cry from double-digit inflation. Nonetheless, comparisons with the 1970s abound

Economists are quick to point out that we should be careful citing year-on-year growth rates this year. Last year was very, very unusual. And last year serves as the base for this year’s year-on-year growth rates. The high inflation rate observed in June, for example, might indicate that the price level was high in June 2021, low in June 2020 or some combination of the two. With this problem in mind, I have half-jokingly suggested we all just stop presenting year-on-year growth rates until July 2022.

To consider whether the price level was too high in June 2021, we must first specify the relevant counterfactual –that is, what the price level should have been. To this end, it is useful to distinguish the trend (or average) rate of inflation from the rate that results when inflation deviates from trend for a period of time and the Federal Reserve (Fed) takes steps to offset those deviations.

The Fed controls the trend rate of inflation. Conventional macroeconomic theory suggests it should set its inflation target equal to the optimal rate of inflation. Of course, there is some debate about what the optimal rate of inflation is. Some economists argue that it is slightly positive. Some economists argue that it is slightly negative. But most academic journal articles on the topic – and the most highly cited journal articles on the topic – maintain that the optimal rate of inflation is zero. In practice, this might amount to targeting a slightly positive measured rate of inflation, since conventional measures of the price level, like the CPI, tend to underestimate quality improvements and, correspondingly, overestimate inflation. 






The Macro View

About William J. Luther

William J. Luther is the Director of AIER’s Sound Money Project and an Associate Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including the Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular writings have appeared in The Economist, Forbes, and U.S. News & World Report. His work has been featured by major media outlets, including NPR, Wall Street Journal, The Guardian, TIME Magazine, National Review, Fox Nation, and VICE News.

Articles by William J. Luther

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