Summer is almost over, and the latest economic data suggests that the season’s inflation mania is also reaching an end.
Former Treasury Secretary Larry Summers kicked off the fears among the economic chattering class in March, calling Biden and the Fed’s approach the “least responsible” macroeconomic policy in 40 years – meaning even less responsible than the 2008 housing bubble that nearly brought down the world economy.
Fast forward to August’s consumer price index, and the argument in favor of “team transitory” – ie, Biden and the Fed – look stronger and stronger.
Consumer prices rose 0.3% in August, the Bureau of Labor Statistics said Tuesday, marking the second straight month of a slowdown in price growth. The Consumer Price Index – a popular measure of US inflation – still sits at decade highs on a year-over-year basis. But the slower growth seen in August suggests inflation could be tapering off and matching the predictions of the Biden administration and the Fed.
Several Biden administration officials, including Labor Secretary Marty Walsh, said that they weren’t overly concerned about inflation this summer and they believed such price spikes would be temporary. Similarly, Fed Chair Jerome Powell said in Congressional testimony in July that most inflation was coming from transitory reopening shocks and should abate through the rest of the year.
On the other side of the debate, beyond Summers, the powerful moderate Sen. Joe Manchin cited worries about runaway inflation in a Wall Street Journal op-ed explaining his trepidation around Democrats’ $3.5 trillion social spending proposal. Tuesday’s read of easing inflation data could make trillions of dollars of a difference if it changes Manchin’s mind on what he may support.
Where inflation is easing up, and where it poses a lasting threat
Other pandemic-affected sectors like airline tickets saw sharp increases in the spring, but had a 9.1% month-over-month decline in August as the Delta wave curbed demand.
In addition to those slowdowns in sectors highly affected by the pandemic, the August CPI report also showed few signs of more deeply rooted inflation that could prove a problem in the longer term.
The housing market is host to some of the most worrying inflation trends. Homebuyers have been facing an uphill battle all summer, with prices in many hot markets skyrocketing. Despite that, broad price increases for housing have remained modest. The shelter sub-index measured by the Bureau of Labor Statistics has risen steadily during the pandemic, but at a slower pace than overall inflation. August saw an even more modest increase in shelter prices:
So far, there hasn’t been an acceleration in the price of shelter. That’s a good sign for longer-term inflation, since house prices and rents tend to be “sticky,” meaning that increases tend to only ratchet up and declines in prices are very rare. The type of long-term inflation feared by Summers and Manchin would likely start showing up in the above chart, and it hasn’t materialized yet.
The August inflation report, then, makes it look like price increases are starting to simmer down. Team transitory is firmly in the lead.
To see why Team Transitory is more confident, it’s important to recognize that there are two ways to discuss inflation: level versus rate of change.
First, there is the “level” of prices: how much does a given basket of consumer goods cost now versus in the past. For instance, the consumer price index today is 272.265, 172.265% higher than its average level in 1982-1984. Put another way, a dozen bananas going from $0.50 to $2.15 would be a level increase.
Second, there is the “rate of change” of that level. When economists discuss inflation, they’re typically referring to this latter basket. All but a few fringe economists believe modest growth in prices over time is healthy for an economy, giving consumers and businesses incentive to spend without eroding purchasing power dramatically. Most economists prefer to look at these prices excluding categories like food and energy, which tend to be very volatile.
Excluding food and energy, BLS data shows consumer prices rising 5% from the end of 2019 through July of 2021, or 3.2% at an annual rate of change – much higher than the roughly 2% annual change that the Federal Reserve and other policymakers aim for. There has been much debate over whether this change in prices has represented a shift in the level of prices or their rate of change.
When economists think about inflation, they tend to look past one-off changes in price levels. The reason is simple: a 5% increase in all prices today is much easier for the economy to digest than 5% today, followed by 5% tomorrow, and 5% the next day. In our current context, the worry is not about the current pop in prices we’re seeing, but whether they’ll keep rising at that rate.
From the perspective of policymakers, level shifts are also less important because they have to decide what will happen in the future. Level shifts are one-off, rates of change happening both now and in the future.
COVID and US inflation
During 2019, the US economy experienced consumer price inflation around 2%, or 2.2% using core CPI specifically. That was a bit slower than the Federal Reserve wanted given very weak inflation in preceding years, but was definitely not excessively high.
Then, COVID hit. Prices plunged overall as consumer demand dried up with people staying at home. That brief stint of deflation only lasted about three months, and by the third quarter of last year prices were rising again in a sharp but short bounce back.
Adding to the price growth were supply chain issues for durable goods, especially autos. Rental car fleets were slashed last year, but low rates and fiscal stimulus meant that they were able to sell those cars. Then, when it came time to rebuild rental fleets, there were no cars to buy. New cars are also in short supply: ports were and are at capacity, shortages of critical parts like semiconductors jammed up production schedules, and consumers still had lots of cash available. All of this added to suddenly soaring car prices.
To break it all down, the chart below shows month-to-month changes in core CPI (which excludes food and energy) converted to an annual rate of change. Core CPI is decomposed into three categories. About 6% of core CPI is “reopening sensitive” categories that are most affected by people getting out of their homes after long restrictions – used cars and trucks, rental cars and trucks, airline fares, and the category of rent that includes hotels. A second category focuses just on non-hotel rent paid explicitly by renters and implicitly by homeowners, accounting for 44% of core CPI. The third and final category is everything else, about half of all core consumer prices.
“Team Transitory” argued that the recent surge in prices was a level shift: it was a real increase in prices, but it wouldn’t sustain into the future. Since it was temporary, “Transitories” further argued that policymakers in Congress and at the Fed shouldn’t ease up on their support for the economy – which is still weak – in reaction to the price jump.
Others, ranging from Republican politicians to economist Larry Summers argued that the recent move higher in the rate of change of prices would continue.
As shown in the chart above, the July inflation report released on Wednesday was a point for Team Transitory. Core prices are still rising sharply, at a 4% annualized rate, but that’s much slower than the double-digit annualized advances in April, May, and June.
Will transitory truly triumph?
Despite accounting for a very small slice of overall core CPI, reopening categories that drove so much of the level shift in prices earlier this year still added 1.26% to the total annualized change, almost entirely because of hotels which added 1.27%. Car and truck rental prices declined, and used cars and trucks added 0.1% to the total annualized change.
Turning to the remaining two major categories from the chart, the biggest concern is rent. Excluding hotels, rental prices added an average of 0.74% annualized per month to overall core CPI from June of last year through April of this year, but over the last two months that has ramped up to 1.43% and 1.35%. That’s a pretty big acceleration, but keep in mind rent accounted for an average contribution of 1.35% during 2019 when inflation was roughly where policymakers wanted it.
In other words, rent is now consistent with pre-COVID policy success when it comes to inflation. Hot rental markets across the country are likely to firm a bit more, especially given the wave of evictions and associated turnover that are taking place with the end of the federal government’s eviction moratorium. But there is some room for higher rent prices that don’t drive overall inflation out of control.
Finally, all other categories are quite volatile. During 2019 they averaged about a 0.85% contribution to the total, compared to 1.40% in August. But as supply chains normalize, durable goods outside of autos are likely to see less price pressure, and a number of historical drivers of consumer inflation in the US (medical care and tuition) are seeing very weak prices – tuition rose just 1.1% over the past year (near a record low), prescription drug prices fell over the past year, and medical care services prices rose less than 1% over the past year.
It’s too early to call the inflation game over, but the July data from the BLS suggests Team Transitory is winning, and a wide range of economic forecasters who cried wolf are going to be sucking wind in the locker room with a loss.
Inflation concerns were stoked on Tuesday when consumer prices between May and June saw their largest one-month increase in 13 years, but bitcoin, often touted as a hedge against a weaker dollar, failed to respond in kind.
US stocks dipped at the open, while bitcoin was flat and then steadily dropped over the course of the morning and early afternoon. The price of the world’s largest cryptocurrency by market capitalization was lower by about 2%, below $33,000 for most of the day following the announcement of the CPI figures.
The asset was trading at $32,854 as of 1:10 p.m. ET Tuesday.
This has happened with past readings, as well. In May, bitcoin fell 7% on a day when CPI data showed prices rising at their fastest rate since 2008. Theoretically, with higher inflation, demand for assets that can serve as alternative stores of values to cash would rise – bitcoin among them.
“Bitcoin isn’t behaving like an inflation hedge anymore and will continue to remain heavy over expectations over higher yields,” Ed Moya, senior equity analyst at foreign exchange firm Oanda, said in a Tuesday note.
That inflation is viewed as transitory, however, could be a reason why the June report wasn’t enough of a catalyst to break bitcoin’s sideways trading, Moya added.
Bitcoin has long been heralded as a hedge against inflation mainly due to its finite 21 million supply of coins. The idea is that bitcoin serves a similar purpose to gold in protecting against reckless fiscal policies that devalue fiat currencies.
Billionaire investor Mike Novogratz once said bitcoin’s value has increased because governments are printing money like “toilet paper.”
Some bitcoin bulls, however, maintain that the cryptocurrency will still prove its purpose one day.
“Bitcoin is still a hedge for inflation in the long run for most investors,” John Wu, president of Ava Labs, the team behind the altcoin avalanche, told Insider.
He continued: “However, given the amount of new investors in the space, there are investors that think of it as a risk asset and those incremental investors may be selling in the short term as a source of fund.”
But it seems that the digital asset is holding firm at its $30,000 support level the more it gets tested, Julius de Kempenaer, senior technical analyst at technical analysis platform StockCharts.com, told Insider.
“As a result, an eventual break below this level will become more and more meaningful,” he said. “If and when this happens, $20,000 is on the cards as the next level of support to watch.”
US stocks dipped at the open after key inflation data showed prices rose more than expected in June.
The Consumer Price Index increased 0.9% in June, far higher than Bloomberg’s consensus estimate among economists of 0.5%. The reading marked the largest one-month change since June 2008.
On a year-over-year basis, prices increased 5.4%, higher than economists’ expectations for a 4.9% year-over-year increase. However, June 2020 was the lowest point for Core CPI during the pandemic shutdown, so year-over-year increases are expected.
“A white-hot June CPI print has the markets jittery this morning. Stripping away food and energy, it was the highest print for Core CPI since November 1991 on a year-over-year basis, however moving forward we expect these inflation numbers to begin to cool,” said Cliff Hodge, Cornerstone Wealth chief investment officer.
Here’s where US indexes stood at the 9:30 a.m. ET open on Tuesday:
Bank earnings began this morning, with JPMorgan beating expectations as the banking giant benefited from record investment-banking fees and the release of cash set aside to cover loan losses.
Goldman Sachs also handily exceeded analysts’ estimates. Investment banking generated its second highest quarterly net revenues ever, just behind the first quarter of 2021, thanks in large part to a robust IPO market. The strong numbers in that segment offset a slowdown in Goldman’s trading business.
Although CPI came in higher than expected, a June Bank of America survey reveals most fund managers believe the global economy has reached “Peak Boom.” Month on month, 2% fewer respondents to the bank’s monthly global fund manager survey believe economic growth and inflation will rise above current predictions. Overall, 74% of fund managers still expect growth and inflation to be “above trend.”
The yield on the US 10-year Treasury gained 1.5 basis points to 1.378%.
The Labor Department released its monthly Consumer Price Index (CPI) data on Thursday, revealing a 5% jump in headline consumer prices year-over-year in May, the fastest pace of increase since August 2008.
That came in above the consensus economist estimate of 4.7%.
Core CPI, which excludes volatile food and energy prices, rose a more modest 3.8% year-over-year in May but still increased 0.7% month-over-month.
Both figures fanned the flames of an already raging debate among economists and market watchers about the nature of current inflationary trends.
Some, including the Federal Reserve, argue that rising costs are only “transitory” – a result of supply and demand imbalances brought about by the pandemic and rapid reopening.
Others, including Cambridge’s Mohamed El-Erian, claim that inflation could be here to stay and question the Fed’s insistence on maintaining ultra-accommodative policies as the pandemic winds to an end.
From Coca-Cola to Campbell Soup, the majority of these price increases have come from consumer staples companies that are most affected by commodity costs.
Whether or not current price increases will remain over the long-term is clearly up for debate, but for the everyday consumer, the reality is life is now more expensive than it was last year.
Detailed below are 10 companies that have already said they are passing rising costs onto consumers due to inflation.
Campbell Soup Company
On June 9, in Campbell Soup’s third quarter, 2021 conference call, the word “inflation” was mentioned 35 times by execs and analysts.
The company revealed it was “impacted by a rising inflationary environment,” and CEO Mark Clouse said he expects “sustained inflationary pressures through the remainder of the year.”
Campbell’s said it will be raising food prices this summer to offset the rising costs. Although CEO Mark Clouse noted, “we are going to be very thoughtful about it. The last thing we want to do is shut down the growth that we’ve worked fairly hard to have.”
The JM Smucker Company
In JM Smucker’s fourth-quarter, 2021 conference call on June 3, there were 10 mentions of inflation, and CEO Mark Smucker said the company would be raising prices to offset rising costs.
“Broad-based inflation is impacting many of the commodities, packaging materials, and transportation channels that are important to our business. We are mitigating the impacts through a combination of higher pricing inclusive of list price increases, reduced trade and net revenue optimization strategies, as well as continued cost management,” Smucker said.
Stanley Black & Decker
In Stanley Black & Decker’s first quarter 2021 earnings presentation on April 28, in a slide entitled “Commodity Inflation Update,” the company said steel, resin, base metals, electrical components, and batteries have pushed incremental inflation costs up for 2021 by $160 million vs. January guidance.
The slide showed Black & Decker’s plans to increase prices to offset costs.
In an interview with Yahoo Finance in April, Whirlpool’s CFO Jim Peters said the company was seeing price increases and would pass the costs onto consumers.
“We took price increases in every region of the world, that range from 5% to 12%,” Peters said. “Those are driven by commodity cost increases, and it’s something we have done historically.”
The company said in its first-quarter conference call that the price increase actions “will offset the impact of global supply constraints and rising input costs.”
Kimberly-Clark said it would be raising prices on products like Scott toilet paper and Huggies diapers by “mid-to-high single digits” in late March.
Then, in the company’s April 23 first-quarter earnings call, execs said they saw “sharp rises in input costs.”
Michael Hsu, Kimberly-Clark’s chairman and chief executive officer, said the company was “moving rapidly, especially with selling price increases to offset commodity headwinds.”
Honeywell’s CEO Darius Adamczyk announced that “inflation is taking hold” and affecting his business’ bottom line in the company’s first-quarter 2021 conference call on April 23.
The CEO said, “there’s no doubt about it. We knew it. We see it.” Honeywell announced it would be “quickly taking action” on pricing to stay ahead of the problem.
The Clorox Company
Clorox’s VP of Investor relations Lisah Burhan told investors in the company’s third-quarter 2021 results on April 30 that the company has seen “significant resin price inflation.”
In order to “manage those rising costs,” Clorox announced “pricing action” effective in July. “As we’ve mentioned, we’ll manage inflationary pressures holistically using all the tools in our toolbox,” Burhan said.
Procter & Gamble
Procter & Gamble COO Jon Moeller told analysts in an April 20 earnings call that “this is one of the bigger increases in commodity costs that we’ve seen over the period of time that I’ve been involved with this, which is a fairly long period of time.”
The company said it will begin “the process of implementing price increases on its Baby Care, Feminine Care, and Adult Incontinence product categories in the United States to offset a portion of the impact of rising commodity costs,” noting that the “exact amount of the price increase will vary by brand and sub-brand in the range of mid-to-high single-digit percentages and will go into effect in mid-September.”
In mid-April, Coca-Cola’s CEO James Quincey told CNBC’s Sara Eisen on “Squawk on the Street” that the company would be increasing prices to offset rising costs.
“We are well-hedged in ’21, but there’s pressure built up for ’22, and so there will have to be some price increases,” Quincey said.
“We intend to manage those intelligently, thinking through the way we use package sizes and really optimize the price points for consumers,” he added.
Reynolds Consumer Products
Reynolds Consumer Products revealed that a three-step price increase is already underway on some of its most popular products last month.
“Price increases have been implemented, and a second-round is underway, with plans for a third-round to be implemented in the third quarter,” Michael Graham, Reynolds chief financial officer, said during the company’s first-quarter earnings call on May 8.
And it’s not just shoppers facing higher prices: The owner of Burger King and Popeyes says prices for its key ingredients, including bacon, are rising, according to an internal report viewed by Bloomberg News.
The cost of bacon rose 1.8% between April and May, according to BLS data – this was a slower increase than March to April, when bacon prices jumped 3.4%.
Supply shortages and rising costs of pig feed were making pork products more expensive, Jayson L. Lusk, head of the Department of Agricultural Economics at Perdue, told the “Today” program in April.
The cost of other household staples has risen sharply, too. Over the past year, whole milk prices have risen 7.2%, beer 2.4%, and cigarettes 7.6%, the BLS data showed.
Whiskey has also climbed 3.7% in the past year, BLS data showed. It rose 0.7% from April to May, having fallen 0.2% in the previous month.
The overall consumer price index (CPI) rose 0.6% from April to May, and has surged 5% in the past year.
The monthly CPI jump was due mostly to a 7.3% rise in the cost of used cars and trucks, which accounted for about one-third of the seasonally-adjusted all items increase. Gasoline prices surged 56.2%, and car and truck rentals grew by 110% year-on-year.
As Insider’s Juliana Kaplan and Andy Kiersz reported, multiple under-the-radar signals suggest an inflation slowdown could be coming.
The 5% year-on-year inflation was the strongest since August 2008, and beat economists’ expectations. But annual price rises are measured against an unusually low base in May 2020, when most of the country was in lockdown.
An ongoing computer-chip shortage has affected cars, iPads, and dog-washing technology alike. Chipmakers like Intel had already seen production issues pre-pandemic, but as with many industries, COVID-19 brought a variety of new supply-chain issues. The chip shortage is a problem for consumers wanting basically anything with a computerized component, which is much of the economy. Take cars as an example.
The semiconductor shortage has hit automakers the hardest. In January, the consulting firm Alix Partners estimated the automotive industry would lose $61 billion in revenue from the shortage this year. As Insider’s Katie Canales reported, demand for chips has gone up as consumers scrambled to buy cars and other technologies that use them.
But as more cars went into production, chip competition went up. Since then, many carmakers have been forced to shut down plants and prioritize which models they produce, while car prices at dealerships have continued to go up.
Buyers are still looking for vehicles, creating a competitive used-car market. As USA Today reported, used-car prices are on the rise as the aforementioned chip shortages affect new-car production, and buyers have turned to older ones instead, while Axios reported the average price of a used car has hit $17,609.
A UBS note estimated that in April, used cars saw their largest monthly price increase in 68 years of tracking, with prices rising between 8.2% and 9.3%.
If you’re looking to rent, you might also be out of luck: Insider’s Brittany Chang reported on the “perfect storm” hitting rental cars right now, with prices surging and demand increasing. Americans are itching to go on vacation this summer, as more people are vaccinated and some restrictions loosen. That’s leading to far more demand — but rental-car companies had sold off parts of their fleets early into the pandemic, leaving fewer cars to go around.
It’s not all bad news for used-car lovers, though: As USA Today reports, the trade-in market is hot, too, meaning your old car could be worth more right now.
Gas prices have skyrocketed in recent months, jumping 22.5% in March from the previous year, according to the US Bureau of Labor Statistics’ Consumer Price Index. Much of the surge in gas prices started with the extreme Texas freeze, which halted a fifth of the country’s oil-refining capacity in its tracks for weeks at a time.
Plastics and palm oil
The devastating winter storms in Texas also left their mark on the plastics industry. As Insider’s Natasha Dailey reported, the state is a key plastics exporter — and the storms made many plants, which are difficult to reactivate, press pause.
According to the Financial Times, rising plastic prices have led to an increase in packaging costs. Citing data from Mintec, the Financial Times reported that those costs have increased by nearly 40% from the start of 2020, marking “historic highs.”
Palm oil, which is in a majority of those packaged products, also saw its prices climb, according to the Financial Times. That’s due to yet another labor shortage; the industry had already been contending with finding more sustainable production methods.
In September, Insider’s Rachel Premack reported that pay for truck drivers was on the rise, coming in at “record-smashing levels.” But the pay hike — and increased demand — comes after an exodus of drivers in 2019; Premack reported at the time on what some called a “trucking bloodbath,” as trucking companies saw profits fall, with some even going bankrupt.
Now demand is surging, according to The Journal, and if everything continues as is, that gap could deepen.
Homes and vacation houses
The US was facing a shortage of 3.8 million homes as of April, according to Freddie Mac. Home builders have been struggling to keep up with demand as remote work fuels interest in spacious housing, with house prices rising at their fastest pace in 15 years, The Wall Street Journal reported. Lumber prices are also driving the cost of new homes even higher.
Even vacation-home rentals are at an all-time high. A house in the Hamptons rented for $2 million this summer, and 85% of vacation rentals in popular destinations like Cape Cod, the Outer Banks, and the Jersey Shore are booked through August, according to the rental site VRBO.
If you’re wondering why the houses around you are getting more expensive, look to their component parts. No, seriously: Lumber prices have soared, and, as Insider’s Ayelet Sheffey and Libertina Brandt reported, builders are even increasing house prices in an attempt to offset demand.
It’s due to another pandemic disruption, as lumber mills were forced to temporarily close for safety concerns. When they reopened, they couldn’t keep up with a scorching-hot housing market, goosed by a work-from-home economy, record low mortgage rates, and the need for personal space during the pandemic.
According to an April analysis from the National Association of Home Builders, soaring lumber prices added $36,000 to the cost of a new home. Lumber prices “remain stubbornly high,” according to the report, due to mills shutting down, unexpected demand from big-box retail and DIY-ers, and tariffs imposed on Canadian lumber.
Household products like toilet paper and tampons
Many household goods including toilet paper, diapers, and tampons are also facing supply problems.
One of the biggest producers of the pulp used to create toilet paper told Bloomberg that port delays and high shipping costs are causing companies to push delivery dates back months.
The work-from-home lifestyle helped the furniture industry boom but to such an extent that customers are seeing delivery dates that are months out.
In February, La-Z-Boy executives said customers could expect delivery dates that are five to nine months out from their order dates. Other furniture companies like Kasala, a Seattle-based chain, said they don’t expect to get furniture parts until at least December.
The furniture shortage has been exacerbated by a spike in homeownership, as the number of available and unsold homes sits at record lows. In other words, a lot of new homeowners are waiting a long time for their new living-room sets.
Bacon and hot dogs will likely be in short supply this summer.
The pig shortage dates back to the onset of COVID-19 and outbreaks in at least 167 meat-processing plants forcing almost 40 plants to close as of June 2020. As vaccination rates pick up and people prepare for summer vacations and cookouts, analysts told Insider’s Natasha Dailey demand will outstrip supply.
With pork companies still struggling to overcome lower production rates in 2020, the matter only intensified when high instances of disease hit the hog population this past winter.
Some companies are already seeing the impact on their shelves. In March, Costco said its supplies of cheese, seafood, and olive oil were running low.
General Mills said it has been forced to raise prices due to the delays increased shipping costs. Coca-Cola also raised prices to combat the supply-chain crunch. Neither company specified which products would be affected.
Coffee has also been hit by delays, Bloomberg reported in March. Peet’s and JM Smucker, the brands behind Folgers and Dunkin’ coffee, have said they’re facing rising costs. Reuters reported that in February, port delays pushed coffee prices to their highest point in more than a year.
This summer pool owners will see the worst chlorine shortage in US history, according to CNBC.
Supplies of the chemical have been strained since a fire at the chlorine manufacturer BioLab in Louisiana in September. The price for chlorine used in pools has nearly doubled this past year and is expected to rise even more to meet demand this summer.
Corn is a key crop for many products, including fuel and different foods. As supply concerns loom, corn prices are popping off, according to Axios.
There’s a few reasons that demand is so high: After an outbreak of swine fever in China, pig herds were “decimated,” according to Axios, leading to huge corn demand in China. That spike in demand is coupled with corn crops in Brazil and Argentina experiencing both bad weather and pandemic-related labor shortages.
Now corn prices are on a record-setting clip, rising by 16% in April alone.
And, as Fortune reported, there could be a domestic supply issue too. Droughts and a rough winter are both concerning — and if American crops can’t fill in the gaps, prices could rise even more.
Finally, a commodity unlike all the others is in surprisingly short supply: workers.
Major labor shortages are hitting businesses across America. As Insider’s Kate Taylor reported, chains like Dunkin’ and Starbucks are struggling to find workers — leading to reduced hours and hesitance on opening indoor dining back up.
There’s a few possible reasons that unemployed workers are opting not to return, according to Insider’s Ayelet Sheffey. They include workers making more on unemployment benefits than in their prior work as well as continued concerns over COVID-19 and the need to provide childcare at home.
The latest commodity seeing a price squeeze amidst shortages and high demand is used cars.
A note from UBS researchers led by Alan Detmeister found that not only did used-car prices climb in April, but the monthly price increase could be the largest in 68 years of tracking. It looks like prices may have risen by 8.2% to 9.3%.
Used cars have been in high demand due to a few of the factors driving the shortages all over the American economy. The economy is reopening, people are ready to spend money (perhaps from new stimulus checks), and they want cars – especially as more suburban areas boom with wealthy transplants. But new cars are being hit by a computer chip shortage that’s hitting the automotive industry hard.
As Insider’s Grace Kay reported, semiconductor shortages could cost automakers billions, and has already led to lower production rates for new cars. Even Elon Musk has said that Tesla’s suffered from supply chain and semiconductor woes. Cue a used-car boom, with the market heating up and trade-ins fetching higher prices.
According to UBS, prices on used cars may only climb in the coming months, due to a lag in wholesale to retail pricing. New car prices are also likely to pick up, increasing by 1%.
Why there are so many shortages, and which ones may pick up next
It may seem that everywhere you look, a new product is in a shortage. Chicken, diapers, corn, gas, furniture: The list of shortages goes on, and will likely only grow amid economic reopening. That’s due to some of the same factors impacting used and new cars. Supply-chain issues have persisted throughout the pandemic, and factories shuttered for safety reasons need to crank back to life as demand steepens.
The climate crisis also has a role, with several domestic products in the US – such as plastic and gas – impacted by factors including the devastating winter storms in Texas. Droughts are impacting the worldwide corn supply amidst high demand; Insider’s Will Daniel reports that corn prices have jumped 142% in the past year.
UBS projects 12-month headline Consumer Price Index (CPI) inflation rising to 4.3% from 2.6%, “an enormous surge over just the past few months.” Economists’ median estimate for April CPI is 3.6%, per Bloomberg.
UBS projects hotels and airfares will be next to see substantial price increases. Axios reported – in an article aptly titled “Our crazy, booked-up summer” – that summer travel in the US is about to boom, with a particular emphasis on domestic travel.
A recent report from the US Travel Association found 72% of Americans are planning a summer vacation in 2021; that’s compared to 37% last year. That probably won’t help the already intense rental car shortage.
Prices of common consumer goods rose faster than expected last month as widespread reopening accelerated the economic recovery.
The Consumer Price Index, a popular measure of overall inflation, gained 0.6% from February to March, according to data published by the Bureau of Labor Statistics. Economists surveyed by Bloomberg had expected an increase of 0.5%. The reading follows a 0.4% gain in February. A 9.1% surge in gasoline prices drove the bulk of the uptick.
Core inflation – which excludes volatile energy and food prices – increased 0.3%. That also exceeded the median estimate of a 0.2% month-over-month jump.
Consumer prices jumped 2.6% year-over-year, marking the largest increase since the pandemic began. The reading also exceeded the economist forecast of a 2.5% climb. The measure is somewhat skewed, however, by data from March 2020, when prices declined when the pandemic first froze economic activity. That drop artificially lifts the year-over-year figure by giving the latest measure a lower bar to clear.
“We expect year-over-year inflation to remain steady as the upward pressure of a fast-reopening economy and fiscal stimulus is counteracted by somewhat tougher year-over-year comps,” David Kelly, chief global strategist at JPMorgan Asset Management, said.
Still, the increases suggest inflation will strengthen through the economic recovery, as expected. Price growth trended below the Federal Reserve’s 2% target for decades, signaling consistently weak demand. Now, with businesses reopening, consumers deploying stimulus-boosted savings, and hiring picking up, economists expect inflation to come in above 2% for some time.
The Fed anticipated such a bounce and has dampened concerns that inflation will run rampant. The central bank adjusted its inflation target in August to pursue above-2% inflation for a period of time to counter years of below-target price growth.
Fed Chair Jerome Powell has said that, while reopening will drive stronger inflation, the effect will likely be “transitory” and quickly fade as the economy enters a new normal.
“It is more likely that what happens in the next year or so is going to amount to prices moving up, but not staying up. And certainly not staying up to the point where they would move inflation expectations above 2%,” Powell said in early March, adding the central bank will “be patient” in waiting to pull back on its ultra-accommodative policy.
Americans, however, aren’t yet buying Powell’s message. The median expectation for one-year inflation rose to 3.2% last month, its highest point since 2014. The estimate for three-year inflation edged higher to 3.1% from 3%. Though the Fed hasn’t clarified how high it’s willing to let inflation run, 3% price growth would be the strongest since the early 1990s.
While it’s true that inflation expectations have steadily landed above actual inflation for decades, expectations alone can drive inflation higher. Businesses tend to lift prices and workers usually demand higher wages when the country expects stronger inflation over the next year.