May 11, 2022

The CPI rose 0.3% in April after having umped 1.2% in March.  It rose 1.3% in 2020, and 7.1% in 2021.  The year-over-year increase now stands at 8.2% and we expect the CPI to increase 8.1% in 2022.

Food prices climbed 0.8% in April after having jumped 1.0% in both February and March..     In the past year food prices have risen 9.0%.  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 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 2.7% in April after having surged by 11.0% in March.   The earlier run-up in energy prices (prior to February) seemed to be a reflection of the global economy gathering momentum.  The big jumps in February and March are war related.  In the past year energy prices have risen 32.6% as crude oil prices have now reached $100 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 0.6% in April after having climbed 0.3% in March.  The  year-over-year increase now stands at 6.1% after having risen 5.5% in 2021.  For what it is worth, we expect it to climb by 6.4% in 2022.

A  airfares surged by 18.6% in April after jumping 10.7% in March after having climbed 5.2% in February.   In the past year airfares have risen 33.3% and are now 10.6% higher than they were prior to the recession.  They should finally begin to level off.

Used car prices declined 0.4% in April after having fallen 3.8% in March and 0.2% in February.  Used car prices have risen 22.7% 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 some evidence of that happening but the chips shortage is still curtailing the production of new vehicles.

New car prices jumped 1.1% in April after having risen 0.2% in March.  For the year as a whole new car and truck prices have risen 13.3%.  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 rose 2.0% in April after having climbed 3.7% in March.  Room rates have risen 22.6% in the past year.  Hotel room rates should slow as the year progresses.

In addition to used cars, airfares, and hotels, we are  seeing signs of inflation beginning to climb elsewhere.  Home prices have jumped 19.8% 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 delivery obstacles suggests that rents will continue to climb for some time to come.   The shelter component of the CPI rose 0.5% in February, March and April.  This means the year-over-year increase now stands at 5.1%, but the pace is accelerating.  In the past three months rents have been rising at a 6.2% 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 was on the rise primarily because of 9.9% 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 9.9% increase in a year  is far too rapid and is going to cause the inflation rate to remain elevated in the months ahead.  Then, along came the war between Ukraine and Russia and oil prices have soared as have food prices.  As a result all shipping costs and airfares will begin to accelerate.  Inflation is going to look ugly for some time to come.

The core CPI rose 1.6% in 2020 and 5.5% last year.  We expect it to increase 6.4% in 2022 and 5.4% in 2023.

Stephen Slifer

NumberNomics

Charleston, SC