But it is wrong to get all worked up over today’s high inflation. It will soon abate. Businesses that suffered a direct hit from the pandemic (airlines, hotels, clothing stores and restaurants, for example) are simply restoring prices they slashed early on to survive the pandemic. This is a one-time adjustment. To see how big an impact this is having, consider that consumer price inflation over the past two years, which abstracts from the wild pandemic-induced swings in prices, is up 3% annually. Still on the high side, but much less so.
It is also typical for inflation to get a temporary bump on the way out of a recession. Demand picks up right after economic downturns, but supply is slow to catch up, and prices spike. This happened after the financial crisis a decade ago. Businesses are unsure whether the improved demand has staying power and are cautious about ramping up production. It takes some doing to get shuttered factories, mines, hotels and global supply chains back up and running. The last thing they want coming out of a recession is to be wrong-footed about demand.
If history is our guide, higher prices quickly convince consumers to buy less of what costs more. And, given how much money can be made at these higher prices, businesses figure out how to iron out their supply-chain issues and increase production. Frictions that made it difficult for supply to catch up with demand are resolved, and prices moderate.
If everything sticks roughly to script, inflation will moderate to between 2% and 3% by this time next year. Not too hot. Not too cold. Just right.