Don’t Trust the Conventional Wisdom: Inflation Isn’t Peaking.

Recent purchasing manager indexes are largely behind the growing assumptions that pricing pressures are topping. Nancy Lazar, chief economist at Cornerstone Macro, says a falling spread between the new orders and production components of the Institute for Supply Management’s national manufacturing survey signals that the demand-supply imbalance is easing. Some economists found evidence of a peak in the December consumer price index itself, with Aneta Markowska, chief economist at Jefferies, noting slower service-sector price increases and a steady rate of shelter inflation. And then came a slip in producer prices from record levels, suggesting that businesses are feeling less pain and soon consumers will, too.

While evidence of sputtering inflation is as welcome as it is compelling, data age fast in this pandemic era. This past week, Barron’s checked in with SpaceKnow, a New York–based company that monitors economies around the world from space in near-real time. The company’s synthetic aperture radar satellites have night vision and see through clouds to scan U.S. ports, thousands of logistics centers, and major trucking stops.

Daily data gathered from space depict high port congestion—a big factor behind broad supply-chain problems—that isn’t actually improving. “We continue to see high congestion at U.S. ports with no major sign of pullback,” say analysts at SpaceKnow. Container data this month, meanwhile, suggest that any supply-chain normalization has halted. That’s not to mention data showing worsening port congestion in China, a dour sign for domestic supplies.

The takeaway? It is premature to expect inflationary pressures to ease because supply chains are still stressed, says Anu Murgai, vice president of commercial solutions at SpaceKnow.

Now for the rest of the story. Since inflation started climbing, economists, policy makers, and politicians have attributed fast and persistently rising prices to pandemic-induced supply bottlenecks. But there is evidence that demand is also driving inflation. That may seem obvious and inevitable, given the amount of fiscal and monetary support unleashed over the past two years, but some combination of faulty predictions, wishful thinking, and politics has made it unusual to hear it suggested that consumer demand is fueling prices.

Michael Darda, chief economist and market strategist at MKM Partners calls it “the Alice in Wonderland monetary debate,” where economists are focusing entirely on supply-side shocks as a source of inflation and failing to recognize evidence of demand-side inflation.

Specifically, Darda points to nominal gross-domestic-product growth. Driven by changes in real economic activity and in prices, he says, NGDP has compounded at a 14.9% average annual rate over the six quarters beginning in the third quarter of 2020. Looking at just 2021, that rate is 11%. We haven’t seen sustained double-digit NGDP growth since the 1970s, when inflation was also hot, Darda says.

“Rapid NGDP growth means easy money and demand-side inflation. End of story,” he says, explaining that NGDP is equivalent to money multiplied by its velocity and thus a…