US core inflation likely will be volatile during 2021, as underlying economic forces continue to rebalance from the pandemic. The gap between actual and potential output will limit how much inflation can ultimately rise this year, leaving the Fed comfortable maintaining easy policy.

Here are four things investors should know about the path and patterns of US inflation over the course of 2021 and the next few years:

1) BASE EFFECTS SHOULD HEAT UP INFLATION DURING THE SUMMER

Pandemic-related shutdowns caused unusual monthly inflation numbers. In March 2020, core consumer price inflation (CPI) was flat but then fell by 0.4% in April and 0.1% in May—the only back-to-back monthly decline in the past 40 years. Core CPI stabilized in June before rising by 0.5% in July and 0.3% in August.

As those numbers leave the monthly data series, the year-over-year core CPI calculation will be volatile even if underlying inflation is steady. Even sedate monthly inflation of 0.15% through year-end would push year-over-year core CPI to almost 2.4% YoY in the summer (Display). This isn’t our forecast—it simply demonstrates the volatility of core CPI absent a pickup in underlying dynamics.

A chart showing expected fluctuations in US year-over-year core inflation during 2021 if prices grow modestly and steadily each month.

2) UNDERLYING PRESSURE SHOULD PICK UP IN THE SECOND HALF

The demand side of the economy likely will bounce back more quickly than the supply side, pushing month-to-month and quarter-to-quarter inflation up in the second half of the year even if year-over-year calculations start to fall in late summer.