What 2021 Has Taught Us About Inflation

If 2020 was the year we all learned about epidemiology, 2021 has taught us more than we ever wanted to know about inflation. Price rises had remained calm and controlled for four decades, ever since the U.S. Federal Reserve under Paul Volcker hiked interest rates aggressively in the early 1980s. Barely anyone working today has any practical memory of inflation as a serious and problematic reality.

That explains the intensity of 2021’s year-long debate over whether new stirrings of inflation were merely “transitory,” or whether the U.S. and global economies should prepare for a regime where inflation was once again a fact of life. At year’s end, U.S. inflation has reached a stunning 6.8%, the fastest annual rate since 1982, and the Fed has admitted it is more than a passing side effect of the pandemic. The debate is effectively over.

The question is whether — and how — we could have seen this coming. Earlier this year, we introduced Authers’ Indicators, a heat map to track and assess early signs of inflation. Now, the gauge accurately yields a week-by-week picture of growing inflationary pressures. But we can also see why the debate was so fierce. For several months, inflation could just as accurately be read as no more than a transitory phenomenon. Only in the last few months has it grown into a broad and persistent trend.

In this heat map, squares darken as an indicator rises further above its norm for the previous decade (when inflation was thoroughly under control). Note that the entire map darkens as the year goes by. But, in May, when alarm about inflation began to take hold, only a few indicators were extreme. Most had barely started to rise.