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Inflation is there. As in the spring, the most recent CPI inflation report showed that prices generally increased in July. By many.
Overall, prices in July were up 5.4% year-over-year, according to the Bureau of Labor Statistics (BLS), and 0.9% in the last month. The indexes for homes, food, energy and new cars were the main drivers of inflation growth last month. Of course, these items are essential to the basic financial life of normal Americans, thus stretching their bottom line.
Even when you exclude volatile food and energy prices – known as core CPI inflation – prices rose 4.3% year-on-year, or about 2 percentage points. more than before the pandemic.
There are articles that have contributed powerfully to these historic gains, as anyone who has recently purchased an automobile can attest. New cars and trucks were 1.7% more expensive in July than in June, continuing an expensive trend. Energy prices rose 1.8% while gas prices alone rose 2.4%, just in time for the summer holiday season
The Federal Reserve, whose job it is to keep price growth stable, has told anyone who listens to it to expect inflation to rise in the near term as the economy returns to normal. The Fed also says that increases in inflation in the short term should give way to healthier price growth in the longer term.
Yet July’s CPI numbers, combined with those of the past few months, will put that prospect to the test. To say that the higher prices are transient and that inflation was too low before the pandemic is easier than actually experiencing the increase, especially since July wages only increased by 4.0% per year. compared to the previous year.
But what is happening with these rising prices and what does all of this mean to you?
Brothers of Another: Inflation Gains and the Covid-19 Recession
To get an idea of what’s going on, let’s look at the air fares.
Once the Covid-19 pandemic started last spring, demand for travel plummeted. People canceled tickets en masse, delayed vacations, and pulled back as stay-at-home orders took effect. This, of course, led to a sharp drop in the prices of airline tickets.
In April 2020, for example, air fares fell 24% year over year, and they would spend most of the rest of 2020 at these depressed levels. When you compared the prices of airline tickets during the Covid-19 era to the prices before, they were generally around 25% cheaper.
But once the year is over, those year-over-year comparisons change: the June IPC report, for example, compared airline prices during vaccine days to what they were after the strike. of Covid-19. So it’s not too surprising that airline prices in June 2021 were almost 25% higher than a year ago, if only because so few people were buying tickets at the time.
This is one of the key points the Fed has tackled: you need to watch out for these so-called base effects. Now that vaccines are widely available and cases of Covid-19 are on the decline, more people will be flying. Yes, airline prices are much higher than a year ago, but they are still cheaper than they were before the pandemic.
However, these base effects do not explain everything. Take used cars and trucks: While prices fell before the recession, used cars and trucks did not get cheaper than they were in February 2020 In fact, they have never been as expensive as they are today.
The reasons for this rise are linked to the pandemic, of course. Supply is limited thanks to the production of new cars hampered by a continuing shortage of chips, people hanging on to their leases longer and car rental companies – a major source of used cars – having less to unload after limiting their inventory when the pandemic hit.
The Fed has also warned the public of these and other supply chain issues, saying it will take time for sectors of the economy to return to normal. Once these issues are resolved, the Fed says, inflation will stop growing so quickly.
Should we be worried about CPI inflation?
It’s cold comfort for families looking for a used car, and consumers will need to be careful with how they allocate their budget over the next few months. But the weird price movements were an inevitable side effect of shutting down the economy to crush the virus, so they shouldn’t be entirely unexpected. Fortunately, they’re likely to be short-lived, but can linger as the Fed works to get people back to work, notes Nancy Davis, founder of Quadratic Capital Management.
“I think the Federal Reserve is more focused on the employment part of its dual mandate and will remain accommodating for as long as it takes to ensure the economy returns to full employment,” she said. In short, the Fed’s low interest rates and bond purchases, so-called “easy money” meant to encourage economic activity, are probably not going anywhere at the moment and businesses (and their stocks) could continue to grow.
This kind of support is probably needed because the April and May employment reports disappointed many. In June, employers added more workers, but the unemployment rate remains well above pre-pandemic levels and several million people remain without work. Fed Chairman Jerome Powell has repeatedly said he is focused on returning to full employment and will not be swayed by temporary increases in inflation.
In fact, the Fed announced last August that it would tolerate inflation above its target rate for a modest period because inflation has been too low for 10 to 15 years. That said, the Fed does not expect rising inflation to persist once people get back to work.
In testimony to Congress in late June, Powell acknowledged that inflation has been on the rise in recent months and blamed it on base effects, rising oil prices, reopening of their wallets by consumers. and supply chain issues.
“As these transient supply effects subside, inflation should fall back towards our longer-term target,” Powell said.
Market watchers are now wondering how transient this transient inflation spike is and how long average Americans will put up with it.