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The Latest Inflation Readings Are Up. Should We Worry?

Uh, no. For two reasons. First, as Alan Blinder explained his Times column on Sunday, you want to be really careful about taking liquidity and stimulus out of an economy before it's fully recovered from a financial crisis or a deep recession--it's incredibly easy to relapse. Second, as Goldman notes in its daily report yesterday, a lot of the factors driving the recent inflation uptick are pretty transitory. In particular:

[F]our components that in combination make up only about one-eighth of the core CPI [consumer price index] account for nine-tenths of its acceleration over this period [the last seven months], and each has peculiarities, as follows: 

1. Tobacco prices account for nearly two-fifths of the acceleration in the core CPI, largely because of a 21.3% jump in this index in March and April. An increase in the federal excise tax took effect in April; ahead of this companies raised prices in March. ...

2. New vehicle prices account for almost 30% of the acceleration. We have yet to come up with a good explanation for this, but the 6.5% annualized rate of inflation reported for new car prices between December and April clearly does not reflect reality in an industry where a massive pullback in demand has prompted all sorts of high-profile cutbacks ...

3. Apparel accounts for slightly more than one-sixth. Prices of apparel were marked down significantly ahead of the holiday season, and we interpret the 3.4% annualized rebound since year-end as a partial rebound from these deep discounts. ...

4. Public transportation explains another 6%. The lion’s share of this effect is in air fares, which have been heavily influenced by sharp changes in the price of jet fuel over the past year or two. With fuel costs and economic activity both plummeting last autumn, declines in these fares contributed significantly to the flattening in core inflation at that time. ... [But] the rate of decline has eased up. Hence, this index contributes in a back-handed way to the acceleration in core inflation.

--Noam Scheiber