The jump in US annual consumer price inflation to 4.2 per cent reported last week was a shock. But was it a good reason to panic? Not obviously, since special factors can explain it. It was ever thus: when inflation starts to rise, special factors can always explain it. But in truth the big reasons for concern are not what is happening right now, but rather the political forces at work.
Naturally, economic forces shape those political choices. And these forces are currently rather confusing. The unexpectedly big jump in consumer prices followed on an unexpectedly weak employment report: last month, the US added just 266,000 jobs, while the unemployment rate edged up to 6.1 per cent. The obvious explanation is that this is a recovery from an unprecedented recession, driven not by tightening demand but by shutdown of supply.
