Every day, it seems, there is a warning about inflation, especially in the United States where consumer prices jumped 5.4% in July from the previous year and a full increase of 0.9% compared to June. Even excluding volatile food and energy prices, “base” prices rose 4.3%, slightly below the 4.5% reported for June, which was the largest increase since. November 1991.
For those familiar with the ‘decade of inflation’ of the 1970s, rising prices raise fears that the US economy is about to repeat those dark days of double-digit price hikes and insanely high interest rates. . Let’s take a closer look at what’s really going on today.
A small part of the economy is behind the inflation numbers.
Taken at face value, today’s inflation numbers can be alarming. Or at least that’s what we hear, read and see in the business media. But if we take a closer look, we’ll quickly see that the overall increase is due to a few outliers. Energy prices, for example, rose 23.8% from the previous year (and 1.6% from the previous June). Despite this, energy is well below the rise in used car costs, where prices are up 41.7% from the previous year and 10.7% since May. Concretely, even though used car sales only represent 3.2% of the consumer price index, used car prices accounted for a third of the monthly increase between May and June of the global index.
But even used car prices couldn’t keep up with the inflated price of renting a car, which now costs 73.5% more than a year ago. Believe it or not, this is an improvement from June, when the price of a rental was up 87.7%.
What happened? When the pandemic hit, people stopped traveling. And when people stopped traveling, car rental companies stopped renting cars. And since they no longer needed their cars, they sold a huge chunk of their fleets.
In June, when people started to travel, they had to rent cars. But the cars had been sold.
Inflation hasn’t just hit Hertz, Avis and others. Travelers also saw a sharp increase in airfare prices, up 24.6% from a year ago in June and 19% in July, and hotels, up 24.1% from report last July.
Inflation in the large economy is more modest.
We gain a better understanding of the economy – and inflation – if we eliminate components with both exceptionally high and unusually low inflation rates. This study, conducted by the Federal Reserve Bank of Cleveland, reduces one-month inflation rates for components falling below the 92nd percentile and above the 8th percentile of price changes. After removing outliers from used cars, car rentals, major appliances, plane tickets, hotel stays and a few others, the average consumer price index adjusted to 16 % Cleveland Fed measured the July inflation rate at 3.0% from the previous year, an increase of just 0.1% from June, suggesting that excluding a small number of categories, core inflation rose to a more modest level.
What does it mean? Areas with strong price spikes do not reflect stimulus spending or wage pressures. On the contrary, as the pandemic began to lose its grip in June, consumers became more active. At the same time, supply chain constraints – which will likely be resolved over the next 12-18 months – in some sectors have also pushed prices higher.
As such, it seems premature to worry about the dire effects of inflation as there are good reasons to expect the current pressure to ease.
What about those who lived through the 1970s? You can put your “Whip Inflation Now” buttons back into the box.
You know what I’m talking about.
Paul Brown is the owner and founder of Clearstone Wealth Management LLC, an independent, cost-only trust company located in Liberty Lake. He can be contacted at email@example.com or through the Clearstone Wealth Management website at www.clearstonewealthmanagement.com.