The recently-reported annual increase of 5.4 percent in the Consumer Price Index (CPI) that signaled a worrisome rise in inflation is both misleading and dangerous. Any monetary or fiscal policy based on it could harm the American economy.
It is misleading because it reflects a steady-state economy in which the consumer buys a basket of numerous food and service items without any adjustments for the severe constraints and distortions during the pandemic and for the euphoric consumer behavior thereafter. The “apples” that consumers bought and consumed during the pandemic cannot be compared to the “oranges” they purchased and used after the effects of COVID-19 subsided.
And it is also dangerous because it could spur higher inflation. In light of the presently pervasive inflation fear, consumers and businesses are likely to expect higher future prices. As a result, consumers will increase their demand for goods and services before they become more expensive, and businesses will raise their prices because they expect to pay more for labor and material. This way, inflation fears become a self-fulfilling prophecy that could propel runaway inflation.
The U.S. Bureau of Labor and Statistics measures changes in inflation rate or CPI shifts based on more that 200 items that consumers are said to buy and consume. These include the following eight broad categories as well as their relative weights:
Food and beverage 14.6 percent
Medical care 8.5
Education and communication 7.0
Other goods and services 3.2
Each of these categories was drastically affected during and post pandemic in ways that cannot possibly be accurately captured by the CPI. The first three, which amount to 72.5 percent of the index, provide ample illustration.
During the pandemic, most consumers stopped eating out and, as a result, the restaurant industry collapsed. On the other hand, demand for food and beverages from stores, many of which were barred from doing business, went up, as did prices. After the pandemic this situation reversed, and prices of meals eaten out went up. For example, many chain restaurants increased their prices after the disease subsided
Likewise, many big-city dwellers left for the suburbs during the pandemic and pushed up housing costs there, while prices in city centers were dampened. On the other hand, millions of renters who lost their jobs were unable to pay rent and were rescued by the federal moratorium on rent. For example, the price of lumber needed to build more homes to respond to the increase in housing demand in the suburbs skyrocketed during the pandemic and parachuted down afterwards.
Finally, during the pandemic most Americans stopped traveling by planes and automobiles, resulting in much lower cost for air travel, cars and gas. This took a complete turn after the pandemic. Demand for both types of travel and for cars went up substantially, as did prices. For example, prices for used cars went up by as much as 30 percent.
The remaining categories were drastically impacted too, especially the still-ongoing disruption in education and communication.
One conclusion from all of this is that the verisimilitude of the BLS CPI during and after the pandemic is low and unreliable. Therefore, policy decisions based on it in the post-pandemic era are far less useful than they were before COVID took hold.
Indeed, this and other BLS economic information, such as data on employment, are so confusing that some experts erroneously described it as a shortage or stagflation enterprise. This is not the case. I should know. In 1980 I published one of the first books on the characteristics of shortage and stagflation economies.
Another conclusion is that it is prudent to wait and see how the economy and price levels evolve after the tsunami effects of the pandemic. It took more than a year for the extreme pandemic forces to be fully reflected in the economy. It could take as long for the economy and society to fully recover from the pandemic, and for the BLS inflation data to become reliable and reflect changes and CPI more accurately.
Until then, policymakers, especially the Federal Reserve Board, are wise to rely on their judgment in setting interest rates, and be ready to change rates quickly as the economic climate changes. This, thankfully, they have been doing and communicating well.
Avraham Shama is the former dean of the College of Business at the University of Texas, The Pan-American. He is a professor emeritus at the Anderson School of Management of the University of New Mexico. His book, “Marketing in a Slow-Growth Economy: The Impact of Stagflation on Consumer Psychology,” was published by Praeger Publishing, 1980.