The pandemic was a major shock to the U.S. economy — one that destroyed the previous dynamic equilibrium. We're slowly settling into a new one, where prices for various goods and services are very different.
Why it matters: Insofar as inflation is an adjustment mechanism, it's not lasting and it can sometimes even be a good thing.
How it works: Americans' longstanding “we can afford to do this” attitude was turbocharged in the pandemic, when money seemingly arrived effortlessly from everywhere, and millions discovered they could afford to not work at all.
- For these people, the pandemic was the shock to the system that allowed them to realize that they had the ability to follow their passions.
- That mindset is inherently inflationary. On the demand side, it reveals itself in ever-greater willingness to pay for goods and services; on the supply side, we see fewer people wanting to do the kind of jobs, especially in the service industry, that are necessary for such experiences and products to exist.
Between the lines: That kind of inflation is, broadly, not something to worry about. Price inflation is sometimes just a way of revealing a country’s changed preferences.
- There was an old price equilibrium, and now there is a new one; if the new one is higher than the old one, then there will be an interim period of inflation, and that’s fine.
- Insofar as price inflation is a function of hourly workers getting better wages, it’s the good kind of inflation, redistributing wealth from people with excess disposable income to those at the lower end of the income scale.
The bottom line: As we're seeing in the oil market, commodities cycles come and go. Much of the rest of inflation — which is already much lower than it was last year — can be viewed as simply being a function of revealed preferences and healthy optimism.