Devon Zuegel writes:

Inflation hits some parts of the economy harder and faster than others. It’s obvious once you say it, and yet the way pundits and academics talk about inflation glosses over this reality. As a result, most people who haven’t had direct experience with high inflation have a flawed view of how it affects daily life.

She then adds:

Popular use of the term “inflation” makes it sound like the inflation rate is a single indisputable number that you can plug into a formula to make decisions. [Bold is hers.] A pen pal recently made the following (paraphrased) comment in an email to me:

Inflation isn’t actually a problem, since all it’s doing is changing the measuring stick. Businesses can just price it into what they charge, workers can just price it into their wage negotiations, and banks can just price it into the interest rates on their loans.

Nominal prices go up, but on a relative basis, real prices are essentially the same.

Unfortunately it’s not that simple. That model doesn’t factor in information asymmetry, time delays, or structural differences between economic actors. It can take years for an inflation shock to propagate through the economy and reach a stable equilibrium, and it only does so after wreaking havoc on people’s expectations about money and commerce.

This is from Devon Zuegel, “Inflation propagates unevenly,” January 2, 2022.

Zuegel is right. In fact, economists have a term for the uneven propagation of inflation: Cantillon effects. The term is named after late 17th century and early 18th century Irish economist Richard Cantillon, who studied the phenomenon.

Then Zuegel goes on to give an example, writing:

Current prices in the US illustrate the effect as well. The NYT writes that “prices have soared for physical products but have risen only modestly for services. The cost of gasoline is up 58% in the last year, while health insurance prices have fallen almost 4%. Meat prices are up 13%, dairy 1.6%. Boys’ apparel is up 8.4%, while girls’ apparel is down 0.4%.”

Here’s the problem, and the problem is partly with Zuegel’s analysis and partly with inflation. The problem with Zuegel’s analysis is that she can’t say confidently, as she does above, that those very different rates of price change reflect the uneven propagation of inflation. In an economy with much lower inflation, there would still be changes in relative prices. Are Cantillon effects present in the prices she quotes in the above paragraph? Possibly. But it could also be mainly changes in relative prices that would have occurred without inflation.

The problem with inflation is that we don’t know.

Here’s more on Richard Cantillon, who is pictured above.