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The inflation rate could jump, but there’s a simple reason not to read too much into it.

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When the government releases its latest consumer price inflation reading at 8:30 a.m. on Tuesday, Wall Street investors will be eagerly watching the data point, which is expected to jump starting this month.

Inflation data matters because it gives an up-to-date snapshot of how much it costs Americans to buy the goods and services they regularly consume. And because the Federal Reserve is charged in part with keeping increases in prices contained, the data can influence its decisions — and those affect financial markets.

But there’s a big reason not to read too much into the expected bounce in March and April — and it lies in so-called base effects.

Inflation Is Set to Jump



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In March’s data, inflation is expected to rise

substantially above 2 percent.

+2.5%

March 2021

forecast:

+2.5%

+2.0

+1.5

PERCENT CHANGE

IN CONSUMER

PRICE INDEX

FROM A YEAR AGO

+1.0

+0.5

RECESSION

2019

2020

2021

However, some of the jump can be explained

through what’s known as base effects — prices fell

significantly last spring, so the increase now from the

year prior is larger, even if prices are not rising as

dramatically.

265

2021 Consumer price index

2020

255

Jan

April

July

Oct.

In March’s data, inflation is expected to rise substantially above 2 percent.

March 2021

forecast:

+2.5%

RECESSION

+2.5%

PERCENT CHANGE IN CONSUMER

PRICE INDEX FROM A YEAR AGO

+2.0

+1.5

+1.0

+0.5

2019

2020

2021

However, some of the jump can be explained through what’s known as base effects — 

prices fell significantly last spring, so the increase now from the year prior is larger, even

if prices are not rising as dramatically.

265

2021 Consumer price index

260

2020

255

Jan

Feb.

March

April

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.


Notes: C.P.I. of 100 is equal to prices in 1984. The March 2021 C.P.I. forecast is the median estimate in a Bloomberg survey of economists, as of the morning of April 12.

Sources: Bureau of Labor Statistics, Bloomberg

By Ella Koeze

Consumer inflation is usually measured on a year-over-year basis. Statisticians take a bundle of goods and services Americans buy — everything from fresh fruit to apartment rent — and aggregate it into a price index. The inflation rate that is reported each month shows how much that index changed from one year to the next.

For a quarter century, most measures of inflation have held at low levels. The Consumer Price Index moves around a bit because of volatile food and fuel prices, but a “core” index that strips out those factors has mostly come in shy of 2 percent.

But the data reported for March and April may show something different because price indexes dropped sharply a year ago as the country went into lockdown and airlines slashed ticket costs, clothing stores discounted sweaters, and hotels saw occupancy plunge.

That means inflation measures are about to lap super-low readings, and as that low base falls out, it will cause the year-over-year percent changes to jump — a little bit in March, and then a lot in April.

To be sure, climbing prices could last for a while as businesses reopen, consumers spend down big pandemic savings and producers scramble to keep up with demand. Economists and Federal Reserve officials do not expect those increases to persist for more than a few months, but if they did, it would matter to consumers and investors alike.

But a bump in prices isn’t the kind of demand-driven inflation that would prompt the Fed to lift interest rates or slow bond buying in a bid to control prices. March’s figures are most likely just a mathematical quirk.