Putting Inflation in Context
With the economy and prices recovering, the price increases in March and April 2021 are magnified because of the declines seen in March and April 2020. Inflation is measured as the percentage change in the price of a basket of goods from the prior year. So, by construction, the April 2021 inflation report is comparing current prices with depressed prices from April 2020, during the COVID-19 lockdown.
Prices have recently increased because of adverse weather, shortages from supply chain disruptions, and increases in commodity prices caused by the rebound in U.S. and global output (e.g., crude oil, lumber, and steel).
Monetary Policy and Forecasts
Inflation now exceeds the Federal Open Market Committee's 2 percent inflation target. According to the St. Louis Fed's price pressures measure, there's a 61 percent probability that inflation will average more than 2.5 percent over the next 12 months—a level consistent with the Federal Open Market Committee's desire to achieve an inflation rate that "moderately" exceeds 2 percent for some time.
Expected inflation rates have risen similarly in many countries after fiscal and monetary stimulus helped economies recover from the COVID-19 lockdown.
Inflation rates have historically been more internationally synchronized than business cycle variables, such as output and employment, and this synchronization has broadened to include more types of goods and services. The globalization of supply chains, labor, and financial markets has helped link international price changes more tightly.