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Inflation Sizzles in June

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The Consumer Price Index (CPI) accelerated at a 0.9% pace in June, the largest one-month surge in the index since 2008 when oil prices were flaring. The overall CPI surged 5.4% from a year ago in June, also the fastest pace of increase since 2008. Food and energy prices both accelerated as consumers stepped out and drove vehicles to escape lockdowns. Meats and fish, where labor shortages are the most acute, posted the fastest increases in prices at grocery stores. OPEC has been remarkably disciplined at capping oil production, which has compounded the upward pressure on prices at the gas pump over the summer.

Interestingly, the largest increase in food away from home was in food at vending machines. They are more common in offices and break rooms where workers are finally returning. Many restaurants and fast-food establishments in urban centers, where offices are located, shut down during the crisis.

The core CPI, which strips out the volatile food and energy components, jumped 0.9% in June and 4.5% from a year ago, the fastest pace for core inflation since November 1991. More than a third of the increase in the overall monthly CPI may be attributed to a whopping 10.5% jump in used vehicle prices. The contribution to core CPI was even greater. New vehicle prices also increased with ongoing computer chip shortages and tight dealer inventories; vehicle insurance costs also soared.

Higher prices at the gas pump, used vehicle prices and escalating insurance costs are all hurdles for low-wage earners returning to work and exacerbating the upward pressure on wages. Many low-wage workers sold their vehicles to cover the basics of food and shelter while waiting for the first round of stimulus checks and unemployment insurance to come in. Those in urban areas who relied on mass transit to get to work are now commuting to suburban markets, where service sector employment has come back.

Apparel prices, airfares and lodging away from home showed strong gains. Air travel eclipsed the peak hit in late June/early July 2019 during the week leading up to the Fourth of July holiday. With many who have never flown before crowding airports, airlines are struggling to keep unruly passengers in their seats with their faces covered. I just returned from my first flight since February of 2020. After a four-hour delay with no updates from the airline until boarding, I decided that I would wait a bit longer to catch up on my travel. Patience was in short supply and badly needed.

Driver shortages and heavy backlogs are pushing up shipping costs. It was much easier to turn the lights out on the economy as we entered lockdowns than to absorb the backlogs and stress triggered by intermittent lockdowns on the demand for goods and the rush to spend the savings we amassed when restrictions were lifted.

Prescription drug costs and medical care services were some of the few items to actually fall in price during the month. People are pivoting from catching up on medical visits to spending on travel and tourism this summer.

The shelter components outside of lodging away from home remained tame. Rents in urban areas, which plummeted during the height of the crisis, are beginning to firm. That will put upward pressure on costs as we get into the second half of the year. The surge in home values was offset by a jump in mortgage refinancing, which lowered monthly payments for homeowners last year. Watch for more of the increases we have seen in home values to show up in the owner’s equivalent rent component in the second half of the year.

Bottom Line
Inflation is surging along with wages. The surge in prices remained largely driven by COVID but surprised many at the Federal Reserve who hope the surge will be transitory. That possibility is fading, given the accompanying surge in wages. Much will depend on how many workers return to the labor force when schools reopen in the Fall and the catch-up in travel abates.

Hawks within the Fed will gain an upper hand with voting status on policy in 2022; they will push for earlier rate hikes. A tapering of the Fed’s monthly asset purchases is expected to begin by year-end. Chairman Jay Powell will have some explaining to do during his testimony on Capitol Hill this week.

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