October 13, 2021

The CPI rose 0.4% in September after climbing 0.3% in August, 0.5% in July, and 0.9% in June.  It rose 1.3% in 2020, and the year-over-year increase currently is 5.4%.

Food prices jumped 0.9% in September after rising 0.4% in August, 0.7% in July, and 0.8% in June.     In the past year food prices have risen 4.5%.  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 are poised to go higher.  In the case of food, “exception drought” conditions exist in 59% of the western region of the U.S. (88% in California).   Wildfires are rampant.  It is hard to see how food prices change direction any time soon.

Energy prices increased 1.3% in September after climbing 2.0% in August, 1.6% in July, and 1.5% in June.   The recent run-up in energy prices appears to be a reflection of the global economy gathering momentum.  The IMF anticipates 6.0% global GDP growth in 2021. In the past year energy prices have risen 24.8% as crude oil prices have now reached $80 per barrel.  U.S. refiners were hit hard by Hurricane Ida and some of that output has not yet been restored.   At the same time, crude oil inventories are the lowest they have been in seven years.  Meanwhile, OPEC has decided not to quicken its pace of output to counter any of the recent runup. 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.  Think oil prices are going to come down any time soon?  Think again.

The CPI excluding the volatile food and energy prices rose 0.1% in August after increasing 0.3% in July and 0.9% in June.   In 2020 the so-called core CPI rose 1.6%.  The increase in the 12-month period ending in April is now 4.0%.

The core CPI for September rose 0.2% which was slightly less than expected.  In August the core CPI rose 0.1% after much bigger monthly increases in the previous four months.

Much of the tame September outcome in the core CPI was caused by a  6.4% decline in airfares which also fell 9.1% in August. The year-over-year increase is n ow 0.8%.  Air traffic is still 20% below where it was prior to the recession.  As business travel gradually returns that may leave room for further increases in the months ahead.  Currently, airfares are now 23% lower than they were in February 2020 — prior to the recession.  Think they are going to stay there?  Highly doubtful.

Used car prices declined 0.7% in September after falling 1.5% in August.  Used car prices have risen 24.4% in the past year.  Because consumers were unable to get a new vehicle they were forced to purchase used cars, so used car prices skyrocketed.  Once new cars become more readily available the price of used cars will fall.  But there is still no end in sight to the chips shortage that has stymied auto producers..

New car prices rose 1.3% in September after climbing 1.2% in August, 1.7% in July, and 2.0% in June.  For the year as a whole new car and truck prices have risen 8.8%.  The chips shortage does not seem to be going away and some automobile manufacturers have stopped production because they have no place to store almost finished autos that happen to be missing a computer chip.  Does not seem like new car prices are going to decline any time soon.

Hotel room rates fell 0.6% in September after declining 3.3% in August after rising 6.8% in July and 7.9% in June.  Room rates have risen 19.8% in the past year.  Hotel room rates should slow as the year progresses and that process appears to have begun.

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.

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 deliver ysuggests that rents will continue to climb for some time to come.   The shelter component of the CPI rose0.4% in September after rising 0.2% in August, 0.4% in July and 0.5% in June.  This means the year-over-year increase now stands at 3.3%, but the pace is accelerating.  In the past three months rents have been rising at a 4.0% pace.  This is a big deal because rents represent one-third of the entire CPI index.

There is no doubt in our mind that the inflation rate is on the rise primarily because of 13.2% growth in the money supply in the past year.  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 last year money growth soared.  A 13.2% increase in a year  is unprecedented growth and is going to cause the inflation rate to continue to climb in the months ahead.

The core CPI rose 1.6% in 2020.  We expect the CPI excluding food and energy to increase 4.8% this year and then increase 3.7% in 2022.

Stephen Slifer

NumberNomics

Charleston, SC