A 2x4 Costs How Much? U.S. Inflation Comes In Hot Again In May

Today, the U.S. Labor Department reported that its core consumer price index (CPI) for the month of May increased by a whopping 3.8% on a year-over-year basis. This marks the second month in a row where U.S. inflation has handily beaten expectations, and the numbers are frankly quite big—the sequential inflation readings in both April and May were some of the strongest numbers we have seen since the early 1980s (see the blue line below, with a dot marking today’s report).

(Click on image to enlarge)

Source: U.S. Bureau of Labor Statistics

So, is it time to start worrying about a major inflation breakout in the United States? Probably not.

Strong inflation still largely confined to the same handful of sectors as last month

Last month we noted that almost 80% of the inflation was driven by transitory items. Basically, the nation is experiencing large increases in used car prices (due to semiconductor shortages), and in other categories like airfares and hotel prices, which are recovering from depressed levels as the economy normalizes. This is not the kind of inflation that is likely to persist year after year after year. What was hot this month? Well, used car prices (again), airfares (again), and restaurants (new).

Categories like airfares and hotel prices are still running well below their pre-COVID trends, suggesting further strength in the coming months is possible (if not likely). But when looking out to 2022 and beyond, we need to think about inflation more fundamentally.

The basics of inflation: An imbalance between supply and demand

Supply shortages normally resolve themselves over time either by creating an incentive (i.e., a higher price and profit) for businesses that can invest to build out new manufacturing capacity or clear up when whatever event or catalyst that caused the shortage fades away. Here, of course, enters the COVID-19 crisis—marked not only by the enormous dislocations it has imposed on the global economy but also by the historic fiscal stimulus campaigns from governments around the world to keep the economic engine going. As a reminder, inflation is all about too much money chasing too few goods and services.

In the United States, consumer demand was recently supercharged by the $1,400 stimulus checks from the American Rescue Plan. Those checks are unlikely to be repeated. And even if President Joe Biden is able to pass his next stimulus rounds—the American Jobs Plan and American Families Plan—the impact of those bills on the economy is spread over many years, and therefore much less impactful for immediate demand-side risks to inflation.

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Disclosures: These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions ...

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