August 10, 2022

The CPI was unchanged in July after having jumped 1.3% in June and climbing 1.0% in May.  It rose 1.3% in 2020, and 7.1% in 2021.  The year-over-year increase now stands at 8.5% and we expect the CPI to increase 8.1% in 2022.  Swings in energy prices contributed significantly to the June jump and the the unchanged reading for July.

Food prices rose  1.1% in July after rising 1.0% in June and 1.1% in May.     In the past year food prices have risen 10.5%.  Economists typically subtract food and energy prices from the CPI and focus on the so-called “core” rate of inflation.  That is because these two categories are extremely volatile.  They might go up for a few months but then reverse direction and decline almost as quickly as they rose.  But currently both food and energy prices have risen sharply and are likely to go higher.  Ukraine and Russia are big exporters of wheat in particular and corn.   It is hard to see how food prices are going to decline any time soon.

Energy prices fell 4.6% in July after having surged by 7.5% in June and having jumped 3.9% in May.   The earlier run-up in energy prices (prior to February) seemed to be a reflection of the global economy gathering momentum.  The volatility in recent months appears to be war related.  In the past year energy prices have risen 32.9% as crude oil prices have now reached $95 per barrel.  Meanwhile, crude oil inventories are the lowest they have been since 2005.  Finally, the current administration is putting a severe crimp on oil producers by shutting down pipelines and doing its best to drive the entire fossil fuel industry out of business.  Oil prices are not going to come down any time soon. Instead of encouraging U.S. oil companies to boost production which is still well below its pre-pandemic pace, Biden warns them about price-gouging.


The core CPI for March rose 0.3% after having risen 0.7% in June and 0.6% in May.  The  year-over-year increase now stands at 5.9% after having risen 5.5% in 2021.  While the 5.9% year-over-year increase for Ju was the same as it was in June, .  In the past three months the CPI has been climbing at a 6.6% annual rate.

A  airfares plunged 7.8% which undoubtedly reflects the lower cost of jet fuel, after having fallen 1.8% in June but having surged 12.6% in May.   In the past year airfares have risen 27.7%.  They will presumably level off once oil prices stabilize..

Used car prices fell 0.4% in July after having risen 1.6% in June after climbing 1.8% in May.  Used car prices have risen 7.1% in the past year which is far slower than it was earlier in the year  The chips shortage is still curtailing the production of new vehicles, but less so than it did a year or so ago.  As new cars become more readily available the price of used cars will fall.  But before you get too excited, in the past three months used car and truck prices have quickened to a 12.2% pace.

New car prices rose 0.6% in July after climbing 0.7% in June and 1.0% in May.  For the year as a whole new car and truck prices have risen 10.5%.  The chips shortage is less acute than it was earlier in the year, but it does not seem to be going away.  In the past three months new car prices have slowed only slightly to a 9.3.% pace.

Hotel room rates fell 3.2% in July after declining 3.3% in June but this series rose 1.0% in May,  2.0% in April and 3.7% in March.  Room rates have risen 1.3% in the past year.

In addition to used cars, airfares, and hotels, we are  seeing signs of inflation beginning to climb elsewhere.  Home prices have jumped 19.7% in the past year.  Home prices are widely expected to moderate as the year progresses and recent data are consistent with that expectation.

As home prices rise, rents are also beginning to climb as some frustrated potential buyers are forced to rent.  In addition, rental vacancy rates are the lowest they have been since the mid 1980’s.  Rents are going to climb more rapidly until such time as builders can step up the pace of production and alleviate the severe housing shortage. But finding enough bodies and overcoming delivery obstacles suggests that rents will continue to climb for some time to come.   The shelter component of the CPI rose 0.5% in July after climbing 0.6% 0.7% in both May and June.  This means the year-over-year increase now stands at 5.7%, but the pace is accelerating.  In the past three months rents have been rising at a 7.0% pace.  This is a big deal because rents represent one-third of the entire CPI index.  We are now expecting a 6.5% increase for the shelter category in 2022.

There is no doubt in our mind that the inflation rate was on the rise primarily because of rapid growth in the money supply for the past two years.  Typically, M-2 rises at about a 6.0% pace.  But when the Fed purchased $3.0 trillion of government securities back in the spring of 2020 as money growth soared.  It continued to grow rapidly right up through March of this year.  Currently, the level of M-2 stands $3.8 trillion higher than its desired 6.0% growth path.  That means that the economy currently has $3.8 trillion more liquidity than it needs.  Even if the Fed shrinks its portfolio in the upcoming year, there is still likely to excess liquidity at the end of 2023.   M-2 needs to continue to decline to eliminate much of the surplus liquidity that currently exists in the economy.

The core CPI rose 1.6% in 2020 and 5.5% last year.  We expect it to increase 6.0% in 2022 and 5.2% in 2023.  Not very close to the Fed’s 2.0% inflation target.

Stephen Slifer


Charleston, SC