How Average Inflation Hit A Red Hot 2.4%

When even lifelong democrat Larry Summers warns that inflation will hit 5% by year-end and expects it to be anything but "transitory" as the US has "substantial inflation for real. It is not reflected in price indices but it will be or should be soon"...

... you know Joe Biden has an inflation problem, which can be summarized as a staggering 3.4% increase in core PCE.

Of course, there are extreme base effects to consider, and as Goldman's chief economist Jan Hatzius today suggests, "a simple solution is to look at the average annualized inflation rate since the start of the pandemic", which captures both the initial decline and the rebound, which would be somewhat consistent with the intellectually dishonest “averaging” approach used by the Fed’s average inflation targeting (FAIT).

If one looks at an average post-covid inflation reading, the core PCE index has risen at a 2.4% average-annualized rate since the start of the pandemic, versus 3.4% year-on-year in May. According to Goldman, this adjustment is particularly useful in travel services categories affected by severe base effects. For example, annualized inflation has averaged -4.3% for hotels since the start of the pandemic (vs. +9.8% YoY), -3.1% for apparel (vs.+6.0% YoY), and +1.6% for transportation services (vs. +5.1% YoY).

Of course, while these revised categories help explain why the year-over-year rate of core PCE inflation is so high, they do not explain why the average annualized rate since the start of the pandemic is already above 2% after failing to reach the target on a sustainable basis during the last cycle and averaging only 1.8% in the last few years of the longest economic cycle on record.

As a reminder, on Monday we presented Goldman's thoughts how production cutbacks, supply chain disruptions, elevated demand for durable goods, and higher shipping costs have led to significant price increases in several goods categories. For example, used car prices have increased at an average annualized rate of +27.4% since the start of the pandemic (vs. +37.9% YoY and-1.3% on average between 2017–2019), furnishings prices by +4.0% (vs. +5.6% YoY and-0.9% over 2017–2019), recreational goods and vehicles prices by +0.3% (vs. +2.5% YoYand -3.7% over 2017–2019), and other durable goods prices by +0.6% (vs. +1.8% YoY and -2.0% over 2017–2019).

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