U.S. consumer prices reached their highest level in 13 years in June. The price escalation has been driven by the supply crisis and shortages of raw materials. As the economic recovery progress and the costs of travel and transportation services have risen, their impact on inflation has been felt by the people.
For example, during the first half of last year, depressed oil barrel prices allowed Americans to enjoy a very cheap gallon of fuel ($2,200 3,490/gal. But, currently, the average price of gasoline is 3,490 USD/ gal.
According to the Department of Labor, used cars and trucks account for more than a third of the increase in inflation. Economists insist that the price spike is transitory. They believe that having peaked in June, it will tend to decline.
A similar view has been expressed by Federal Reserve Chairman Jerome Powell for months. Investors have been watching closely for signals from the Fed about any change in its ultra-loose monetary policy. Recent fears of a change in policy sent the yield on the benchmark 10-year Treasury note soaring.
But when investors were able to dispel their doubts, 10-year bonds fell back again. Powell is scheduled to present the semi-annual monetary policy report to the U.S. Congress on Wednesday.
Inflation cooling this year
For corporate economist at Navy Federal Credit Union in Vienna, Virginia, Robert Frick, “the June CPI numbers looked scary.” But he clarified that “once again, we see that it was primarily temporary price increases that drove the numbers.” On the other hand, he said the “report is consistent with inflation cooling later this year.”
Last month, the consumer price index rose 0.9%. This is the highest monthly inflation increase figure recorded since June 2008. The previous month, inflation advanced 0.6%. Experts were already expecting a CPI rise of 0.5%. During this period, the price of used vehicles increased by 10.5%.
The automotive industry has not seen such a price boost since January 1953. In recent months, inflation has been driven mainly by used cars and trucks. Such an increase reached a record 45.2% year-on-year. The crisis of microchips and raw materials needed in the industry has decreased the supply of new cars.
The high demand for used cars has then come to cover the shortage of new cars. The direct consequence on the automotive market has been this dramatic rise in prices. Car rental companies are putting pressure on manufacturers to restock new and used cars.
During the pandemic, vehicle dealers did not place new orders with the industry. The industry also did not foresee the current semiconductor shortage and manufacturers in Asia, Europe, and the Americas did not make provisions. Data provided by the auto industry, however, suggests that used car and truck prices will soon cool.
Inflation spreads to other sectors
Rising prices are not a phenomenon unique to the global auto industry. There are serious indications that the inflationary wave is spreading beyond the sectors most favored by the economic reopening. In June, in addition to more expensive fuel, consumers had to pay more for food, rent, and clothing.
Despite the optimistic view of the Fed and many economists, nothing is certain regarding a de-escalation of inflation. There is constant pressure on the supply chain from consumers. Several factors are stimulating high demand in the US.
First, low-interest rates and mass vaccination against covid-19. Then there is the government stimulus of nearly $6 billion since the start of the pandemic. Being able to go out on the street without fear of dying from the Chinese virus is fueling an unprecedented consumer rage in major U.S. cities.
But if inflation does not come down, criticism of the Fed’s monetary and fiscal policies will rain down. The White House has reacted with cautious optimism about the transitory nature of high prices. It bases its forecast on the decline in futures on some commodities such as lumber, steel, and other goods, whose prices rose sharply earlier in the year.
Record price increases Will they be transitory?
From June 2020 to June 2021, the rise in CPI was 5.4%. This price increase had not been seen since August 2008 at the height of the financial crisis. Excluding volatile sectors such as energy and food, the inflation index accelerated by 0.9%. It was coming off a 0.7% increase in May.
June’s so-called core CPI was up 4.5% year on year. A rise of this magnitude has not been seen since November 1991. In May, it had a significant advance of 3.8%.
Meanwhile, on Wall Street, stocks had a mixed session on Tuesday. The dollar gained ground against other currencies. Meanwhile, longer-dated U.S. Treasury bonds also rose.
The Federal Reserve has said that it can tolerate a higher inflation rate for some time to come. It argues that this policy compensates for the years when inflation was below the 2% target. Last year the U.S. central bank brought its interest rate to near zero.
Its additional strategy to maintain the economic pace is to inject money into the economy through monthly bond purchases. Although it can still wait before changing its policy, warning voices are beginning to be heard at the Fed. This is suggested by the minutes of the agency’s June 15-16 policy meeting.
Most officials saw risks of high inflation. Despite the fact that the Fed has not yet sent signals to the contrary, its forecast is to be prepared to act when necessary.
The market supports the Fed’s stance
JPMorgan New York head Michael Feroli said that “the fact that the recent rise in inflation has been dominated by a few categories should give the Fed leadership continued confidence in its view that this is primarily a transitory increase.” He added that this view is shared by the market.
So far about 160 million Americans have been immunized. Demand for travel continues to increase, which has led to an increase in airfares. Hotel bookings have also increased. It is believed that although temporary and by sector, this price escalation will continue for the remainder of 2021.
Many travel-related service prices remain below pre-pandemic levels. Some factors that are driving prices higher are even expected to remain beyond 2022. In June, rental prices experienced a solid increase.
It is not ruled out that with the return of workers to offices, this sector will see a further increase. If so, there will be a greater flow of people into larger cities and urban centers across the country.
Consumer and business perceptions count
Another factor pushing up prices is the shortage of workers. Despite the fact that there are still millions of Americans “unemployed.” The stimulus caused millions of workers not to return to their old jobs to collect government assistance.
But most states are winding down the policy, which officially ends in September. In the coming weeks and months, the return of workers to factories and businesses is expected to accelerate.
Many workers were unable to return to work because child care services were not available for their children. Similarly, the pandemic forced others to take early retirement, further reducing the workforce.
Companies have found it necessary to increase wages to encourage workers to return. These increases are an inflationary factor as well. So, it is not easy to predict that “everything will be back to normal in a few months”.
So warns Loyola Marymount University Los Angeles economics and finance professor Sung Won Sohn. “Rent will not remain tame once government restrictions on evictions end. The housing shortage will continue to drive up rents.”
Some analysts believe the pace of inflation will ultimately be determined by consumer and business perceptions. In fact, high inflation is already part of the expectations of both economic factors. In the past, such expectations have led to strong price pressures.
All are confident that the Fed’s forecasts are correct.