Inflation Sizzled in May

The Consumer Price Index (CPI) jumped by 0.6% in May and 5% from a year ago. That is the fastest pace since 2008. Core CPI, which strips out volatile food and energy prices, surged 0.7% and 3.8% from a year ago. That marks the fastest pace of underlying inflation since the early 1990s, before we saw the great moderation in inflation to 2% or lower.

Some of the surge is due to comparisons with the sharp deceleration in inflation and price levels we saw a year ago. The rest is due to bottlenecks and surge pricing as the economy reopens. One of the most dramatic increases in pricing pressures came from yet another jump in used vehicle prices, which plummeted last year. Used vehicle prices increased 7.3% in May, after reaching 10% in April. Used vehicle prices were up nearly 30% from suppressed levels a year ago. The cost of renting a car or truck rose 12.1% in May, after surging 16.2% in April.

Computer chip shortages in the supply chain have constrained new vehicle production and pushed more buyers into the used vehicle market. This, coupled with the push to replenish inventories that were liquidated during the height of lockdowns last year, has exacerbated shortages. Vehicle insurance costs are moving higher as well. This is raising commuting costs for low-wage workers who are attempting to rejoin the labor market after more than a year without a job.

The jump in used vehicle prices accounted for nearly a third of the monthly surge we saw in the overall CPI in May. We saw the strongest gains on a monthly basis since 1976 for the furniture and household operations component of the index. That reflects the pickup in home buying and remodeling we saw earlier this year.

Consumers have taken note. Their attitudes to buying vehicles and homes soured in May, when they shifted demand toward services. Surging prices were the primary reason for their discontent.

Bottom Line
We are entering what will no doubt be a long, hot summer as consumers continue to spend faster than most producers and service providers can keep up. The report reminds us of the transitory nature of price hikes and how consumers react. Prices are what brings demand and supply into line over time. It underscores the complexity of the hurdles that low-wage workers face in their decisions to return to work; rising commuting costs are narrowing the areas where they can search for work.

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