Let’s Talk About Inflation

Whoo boy. What a CPI print. Here are some highlights in case you have a life and don’t drool over BLS reports:

  • The all items index experienced its largest increase (4.2%) since Sept 2008.
  • The used car index was up 10% in April, its largest increase since 1953.
  • The core index (ex food and energy) was up 0.9% in April, its largest increase since April 1982.

Fun. There will be a tendency in many circles to assume that this is the return of the 1970s or something like that. I think we need to relax and try not to overreact. Here’s why:

1) These figures are exaggerated by base effects. The price index troughed in May of 2020 at 256. So the year-over-year comps start looking exaggerated because of the COVID effect. Basically, the economy was in crash mode last April and May so prices collapsed. And now the economy is booming so you have an exaggerated base effect where the numbers look high in large part because we’re comparing it to a severely depressed environment. In my opinion 3-4% was always the upside risk, as I said last July. So these figures aren’t exactly shocking.

To get some sense of the future we can start to think about how these figures might compare to today’s figure. Basically, you’d need a continued surge in some of these unusual items like used cars in order for a 4.2% rate of inflation to persist. That is a very unlikely outcome.

All that said, we’re going to get several more months of what looks like high-ish inflation since the base effect will persist for most of the Summer.

2) These figures are impacted by several acute prices. Used cars contributed 0.35% to core CPI. Add in hotels and car rentals and almost half of the core CPI increase is caused by 5% of of the index. That’s not gonna continue. For instance, look at used car prices in the last year. This surge is very unlikely to persist. Hell, we’re more likely to see this sort of index being a DRAG on prices a year from now.

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Disclaimer: The content in this article is provided as general information only and should not be taken as investment advice. Article content shall not be construed as a recommendation ...

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