Hey readers,

Prices in the US in September 2021 were 4 percent higher than in September 2020. That’s a big number, one that’s making the pandemic harder to bear for many Americans.

I could add plenty of valid, important caveats to the 4 percent increase — the Federal Reserve actually looks at a slightly different number, that figure excludes food and gas, September 2020 was a bizarre time to compare to — but the basic fact remains that inflation is higher than it's been in a long time.

The last time the “core CPI,” or the core consumer price index (excluding food and energy), grew by more than 4 percent year over year was in January 1992. Something new is happening.

The big question now is what comes next.

It’s possible this is a blip, a spike in prices produced by unique circumstances that won’t persist. Some of the spike is due to idiosyncratic supply issues; if there weren’t a semiconductor shortage, the price of cars — a major utilizer of semiconductors — wouldn’t have shot up as much.

As semiconductor production ramps up, prices here should cool.

Some of the spike also appears to be due to high demand. The American Rescue Plan stimulus package of March 2021 flooded considerable money into the economy, and suppliers struggled to catch up with consumers flush with spending money, with rising prices as a result.

Less government spending in 2022 might mean slower inflation.

The fear of runaway inflation

But there’s a specter haunting the inflation discourse: the specter of “runaway inflation.”

The worry here is less that prices are rising right now, but that this inflation will lead to an inflationary spiral, meaning 4 percent inflation leads to 5 percent and then 7 percent and on and on until we’re seeing prices double every few years.

And stories about inflationary spirals, we’ve long been told, are stories about inflation expectations. Businesses, workers, or both expect that prices will rise in the future — and so they act in ways that cause prices to rise in the future. Inflation accelerates out of control as a kind of self-fulfilling prophecy.

All of which makes a recent paper from a senior Federal Reserve economist all the more striking.

The paper, “Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)” by Fed senior adviser Jeremy Rudd, has already prompted New York Times, Bloomberg, and Economist write-ups, and gone semi-viral in econ circles. It’s acerbically written (check out footnote two) in a way that’s refreshing for a white paper.

Rudd's basic conclusion is that the theoretical arguments for inflation expectations causing future inflation are weak, and the empirical evidence that expectations matter is even weaker.

Rudd notes, for instance, that this kind of expectations spiral should involve short-run inflation expectations. Most business decisions about inventory purchases and hiring are made on a monthly or quarterly basis, not decades at a time.

But the best empirical evidence for expectations mattering suggests that long-run expectations, over the course of years, are better correlated to actual inflation than short-run expectations.

Preston Mui, an economist in the PhD program at UC Berkeley, released another paper almost simultaneously to Rudd's casting more doubt on inflation expectations.

I actually find Mui’s paper more intuitively understandable for laypeople than Rudd’s. Mui argues that basically anywhere expectations might be said to influence inflation, it's hard to see a role.

Workers don't demand higher raises when they think prices will rise, because they can't; workers don't have much bargaining power in the US due to the collapse of unions. Inflation expectations, as measured by surveys, vary a lot whereas inflation, until now, hasn't, which casts doubt on the former's influence on the latter.

And consumer expectations of higher inflation in the future can't explain inflation now because that would entail consumers buying more and more cars and washers and other durable goods indefinitely. They can't do that! You eventually run out of money or banks willing to loan you money.

All of which, to me, suggests that an inflationary spiral is unlikely in the near future. That doesn’t mean that the inflation we’re experiencing right now is costless. It’s costly, quite literally, and insofar as it was preventable, it’s lamentable.

But it’s a big jump from “prices are up right now” to “prices are going to start spiraling upward indefinitely.” We’re not quite at the latter point, and there are theoretical reasons to doubt we’re getting there.

—Dylan Matthews, @dylanmatt