Peak Inflation

Chief Economist Scott Brown discusses current economic conditions.

Oh, wow, déjà vu. Once again, the monthly increase in the CPI exceeded expectations. The Consumer Price Index has now posted its largest two-month increase, and its largest year-over-year increase, since mid-2008. So, naturally, bond yields are… lower???

The CPI rose 0.6% in May, up 5.0% y/y. As with the increase in April, there were three factors. Base effects (a rebound from low levels of a year ago) are about at their maximum. The CPI was up 0.1% y/y in May 2020. Half of the May increase in the CPI was related to vehicles: prices of new cars, used cars, car insurance, and car rentals. The lockdowns of a year ago reduced the number of vehicles going to rental agencies. As a result, there is reduced supply into the used car market this year, while there is an increased demand for vehicles as the economy opens up. This imbalance won’t last forever. Prices in transportation services, including airfares and all the car stuff, were down a year ago. A recovery in these prices is transitory.

Scott Brown
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Ex-food and energy, the CPI rose 0.7% (+3.8% y/y), following a 0.9% increase in April. It was the largest two-month increase since 1982 (and the largest y/y increase since 1992). There are other measures of core inflation (the ex-food & energy figures is the most common). The Cleveland Fed’s median CPI, which calculates the middle of the range of component price increases, rose 0.3% in May, up just 2.1% y/y. The Dallas Fed’s Trimmed- Mean PCE Price Index had also signaled low y/y inflation in April. The increase in inflation is not broad-based.

Commodity price pressures are notable in every economic recovery, reflecting bottleneck production pressures and materials shortages. These pressures fade as the economy recovers. In the current environment, these pressures have been more intense, reflecting the rapid improvement in the economy. However, prices of copper and many other industrial inputs have started to decline. Demand for commodities should remain strong as the global economy improves, but the global outlook is mixed and it will be some time before we see a full worldwide recovery.