Today’s data reflects backward-looking information, which is not necessarily a sign of what’s ahead.

By Neil Irwin

We could be on the verge of a golden era for inflation nonsense. If so, its start date may well turn out to have been Tuesday morning, when new data on consumer prices was released.

The potential for misunderstanding derives from several forces crashing against each other at once. There are sure to be shortages of some goods and services as the economy creaks back to life, which could create scattered price increases for airplane tickets or hotel rooms or, as has been the case recently, certain computer chips.

There are valid concerns that the trillions of dollars of government stimulus dollars could push the economy beyond its limits and create a broad-based overheating.

But to be a savvy consumer of economic data, it’s important to separate those potential forces from the inflation data coming right now, which tells us more about the past than the future. Don’t take the backward-looking information in the new report as proof that those inflation warnings are coming true.

The Consumer Price Index in March reflected a 12-month increase of 2.6 percent, which on its face would appear to be an uncomfortably high rate of inflation. (That said, it was higher than that for several 12-month periods ending in mid-2018).

But March 2020 was not a normal month. The pandemic shut down huge parts of the economy virtually overnight. It would be hard for that kind of experience not to create distortions in economic data that make things hard to parse. The term for this is “base effects,” the misleading results that can show up in year-over-year numbers when something weird happened 12 months ago.

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