Real goods spending is currently about 15 percent higher than it was pre-pandemic, and there were a couple of months when it was 20 percent higher.ДЄre the trends described above a signal that we should expect continued extraordinary inflation for core goods-everything from automobiles to exercise mats-in the coming years? Three factors suggest no. The strength in real consumer spending (shown in figure 4a) has reflected a surge in spending on consumer goods (shown in figure 4b).

In contrast, core services inflation has been close to its average from the early 1990s to 2008 (when the significant decline in house prices dampened shelter costs).ДЄs I have shown, the primary contributor to the recent spike in inflation is core goods. Given this recent history, the skyrocketing goods prices seen during the pandemic are all the more extraordinary. Since 2000, core goods inflation has been negative roughly half the time, meaning that the price of goods (on a quality-adjusted basis) falls on average. The same trends are evident looking at PCE inflation (not shown).ДЇigure 3 shows just how unusual core goods inflation has been: it is higher than itвЂ™s been over the last 30 years. Food inflation is worrying and appears to be a global trend related to the pandemic among other factors. Energy inflation is quite volatile domestic energy producers faced very low prices early in the pandemic, and those producers may be waiting to see if price increases are durable before increasing supply. Figures 2c and 2d show that inflation in energy and in food, which are excluded from core inflation, are both elevated.

In contrast, inflation in core services (2b) has been far more muted and has generally recovered to pre-pandemic rates. As figure 2a shows, core goods inflation has been strikingly high in recent months. Which goods and services have driven the recent run-up in inflation? Figure 2 shows that the answer is core commodities, or goods. Nasiha Salwati and David Wessel Monday, June 28, 2021 That rate is still quite high, but a percentage point lower than the actual annual rate.

For example, if the CPI had grown at a rate close to the Federal ReserveвЂ™s target from the first month of the pandemic through October 2020, the CPI annual inflation rate over the last year would have been 5.1 percent. Some of those price increases reflect a bounce back from the unusually low level of prices in the first part of the pandemic. As measured by the PCE deflator, the annual rate of inflation from September 2020 to September 2021 (the most recent available data) was 4.4 percent. While inflation has increased relative to recent years, inflation is significantly below the levels seen in the 1970s.ДЄs measured by the CPI, the annual rate of inflation from October 2020 to October 2021 was 6.2 percent. Some observers have tried to draw parallels between the current episode in inflation and the 1970s this is incorrect.

If increases in the supply of services lags behind increases in demand for services, we would see new and worrying inflation risks arise.ДЇigure 1 (above) shows inflation from 1969 to 2021, both by the consumer price index (CPI) and by the personal consumption expenditure (PCE) deflator.

Increasing vaccination rates and decreasing the health risks should rebalance spending patterns, leading to a decrease in demand for goods and an increase in demand for services.

The identifiable factors behind goods inflation-a surge in consumer demand and lagging supply-are primarily pandemic-related.

Goods inflation has indeed been extraordinarily high.

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