EconExtra is a series of posts that go beyond the textbook, relating current events and recent developments in economics to content standards, and providing resource suggestions to help you incorporate the current events into your lessons.

The Headline

“Inflation speeds up in April as consumer prices leap 4.2%, fastest since 2008” CNBC

Does this mean that we are now experiencing inflation to a degree that is cause for concern, or is this a temporary phenomenon as the economy reboots?

You may have seen a previous EconExtra on the impact of the Biden Rescue Package on inflation back in March. We now have two more months of data. Many Federal Reserve and Government economists and policy makers are still arguing that this inflation will be temporary and reflects shortages of certain products, like lumber, microchips and used cars, as well as all that stimulus money floating around.

Fed Governor Chris Waller said the following after the disappointing April jobs report (see last week’s EconExtra for more on the jobs report)

“The May and June jobs report may reveal that April was an outlier, but we need to see that first before we start thinking about adjusting our policy stance,” Mr. Waller said in a speech. “We also need to see if the unusually high price pressures we saw in the April CPI [consumer-price index] report will persist in the months ahead.”

In other words, we must wait and see. The WSJ further discusses Fed Governor Waller’s comments on the number.

“The critical question for inflation is how long it will run hot. Mr. Waller said he expects prices are likely to rise between 2.25% and 2.5% a year for the next two years, a scenario that would be consistent with the Fed’s target.”

There is a video clip at the end of this article where Treasury Secretary, Janet Yellen, concurs. Also delivering the same message was the Fed’s vice chair:

“This is one data point,” Richard H. Clarida, the Fed’s vice chair, cautioned shortly after the data release, noting that it might take time for supply to catch up with demand as the economy reopens.”(NYT)

In that New York Times article, Jeanna Smialek explained analysts’ concerns as follows:

“Few analysts expect a return to such huge price gains (of the 60’s and 70’s), in part because the Fed has pledged to act to keep inflation under control. But if officials are prodded to withdraw economic support quickly in order to prevent another “Great Inflation,” it could spur a downturn, as sudden Fed changes have done in the past.”

Resources

These three articles, one by Greg Ip of the Wall Street Journal, and two Upshot articles by Neil Irwin of the New York Times, break down the issue into understandable components. They even attempt to explain the psychological aspect of inflation, something the younger portion of the population has never really experienced.

• Greg Ip distinguishes between transitory and more permanent types of inflation evident today. (WSJ)
• Neil Irwin uses what is happening in the used-car market to explain just how complex the drivers of price increases can be, looking at all the decisions made by individuals and companies that were very rational at the time they were made, and how they drive these (unintended) consequences.   You also get a feel for how complicated any fiscal policy really is in terms of how it can impact price levels. (Upshot 1)
• Neil Irwin then breaks the inflation discussion down to five questions to ask to characterize the inflation we are experiencing, and the implications of the answers to each question. (Upshot 2)

The Assignment

• Have students looking at the CPI data release (and graph pictured below) and reading the three articles.
• Assign students a price category pictured in the chart. Students then select an appropriate framework(s) described in one of the articles to evaluate the pricing trend for that category. (The data behind the data is available in the “chart data” tab.)

Other Resources on Inflation (FYI)

The Cleveland Fed's Center for Inflation Research website has some useful general information about inflation, written at both a basic and a more technical level. Take your pick. They also have a little quiz on inflation ready to go. This material might be a good place to start a conversation about inflation.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.