The prices for US consumers has seen the biggest jump in 13 years. The primary cause behind this is the swift rebound of spending that has run up against the supply shortages that the companies are facing from all over the world. This supply shortage has led to the increase in the cost of many goods and services.
The Labor Department submitted a report on Tuesday showed that the consumer prices in June rose 0.9% from May and 5.4% over the past year. This was the largest spike in the year-on-year inflation since August 2008. The core inflation, which excludes the prices of gas and oil, rose by 4.5% in the last year, and is the largest since November 1991.
The rise in inflation coincided with the reopening of the economies after the pandemic recession, and it will likely intensify a debate at the Federal Reserve and between the Biden administration and congressional Republicans about how persistent the accelerating price increases will prove to be. The Federal Reserve and the White House have stated clearly that this current rise in inflation is going to be temporary. The two parties suggest that soon after the supply bottlenecks are resolved and the economy returns back to normal, the prices of items such as used cars, hotel rooms, and clothing will come back to normal.
There are some economists and Wall Street investors that agree with the Federal Reserve and the White House. “The headline inflation numbers have been eye-popping in recent months, but underlying inflation remains under control,” said Gus Faucher, an economist at PNC Financial Services. “Once again a few categories — used vehicles, airfares, rental cars, hotels — are experiencing huge price gains because of the recovery from the pandemic.”
The continuously rising inflation raises the prospect of the Federal Reserve deciding to act earlier than expected and pulling back the ultra-low interest rate policies. These policies were introduced to support more borrowing and spending. If these policies are repealed, it would increase the risk of weakening the economy and potentially derailing all hopes of recovery.
For now, price increases are running ahead of the wage gains that have kicked in this year, which means the financial burdens on millions of households have grown more difficult. Average hourly earnings increased 3.6% in June compared with a year earlier, normally a solid gain, but far less than current inflation. Lower-income workers are also hardest hit by rising food prices, which rose 0.8% in June, and gas costs, which rose 2.5% last month and 45% from a year ago.
One reason why year-over-year inflation readings are now so high is that the most recent prices are being measured against the sharp price declines that followed the eruption of the pandemic in March of last year. That statistical distortion began to fade in June and will no longer be a factor when July’s year-over-year inflation figures are released next month. Looking past those distortions, prices are rising faster than they did before the pandemic but not as much as the recent monthly numbers suggest. Greg McBride, chief financial analyst at Bankrate, noted that compared with June 2019, inflation has risen at about a 3% annual pace over the past two years. That is up from a 2.6% annual inflation pace from May 2019 to May 2021.
There are some price spikes that could soon fade out of existence. Hotel room prices surged 7% in June alone and 15.1% in the past year, the most on records dating to the 1950s. But that surge has merely returned hotel prices to pre-pandemic levels and so may not persist. Airline fares, which jumped 2.7% last month, have skyrocketed nearly 25% compared with a year ago. Yet airline ticket prices are still below pre-COVID levels. Prices for used cars are far above where they were before the pandemic and soared 10.5% last month alone — the largest such monthly increase on record. That spike accounted for about one-third of the monthly increase in consumer prices for a third straight month.
Used cars have become vastly more expensive largely because semiconductor shortages have cut production of new cars, thereby leading more buyers to the used car lots. And many rental car companies sold portions of their fleets during the pandemic to raise cash and are now desperately buying up used cars to replenish their supply. The shortage of rental cars combined with greater demand has elevated vehicle rental prices by an astounding 90% in the past year. The surge in used car prices, though, isn’t likely to last. Prices are starting to drop at wholesale auctions where dealers buy vehicles, and used vehicle demand may be slowing. Restaurant prices rose 0.7% last month and 4.2% over the past year, a sign that many companies are raising prices to offset higher labor costs.
David Kelleher, who runs a Stellantis (formerly Fiat Chrysler) dealership in Glen Mills, Pennsylvania near Philadelphia, has observed that fewer of his customers are seeking used vehicles. “I think the word got out that it was a tough time to buy a used car,” Kelleher said. He has cut the prices of nearly 150 cars in his lot and has said that the other dealers are also reporting similar conditions. He said that he expects the customers to return once the prices have returned back to normal.
The cost of household furniture increased 0.7% from May to June and 8.6% compared with a year ago, as more Americans have upgraded their homes after spending more time there during the pandemic. Mohawk Industries, which makes carpets and tiles, has said it will raise prices 6% to 10% — its third price hike of the year — to cover higher costs for raw material, labor and shipping.
The spice maker McCormick & Co. said it plans to raise prices to offset higher raw materials costs. Likewise, Conagra has said inflationary pressures have reduced its profits. The company, which makes everything from Duncan Hines to Pam cooking spray, has said it will raise prices to offset some of those costs. PepsiCo, too, said it will likely raise prices for its drinks and Frito-Lay snacks after Labor Day.
Investors have come to terms with the Federal Reserve’s belief that the higher inflation will be short-lived, with bond yields signaling that inflation concerns on Wall Street are fading. Bond investors now expect inflation to average 2.4% over the next five years, down from 2.7% in mid-May.