January 12, 2022

The CPI rose 0.5% in December after having jumped 0.8% in November and 0.9% in October.  It rose 1.3% in 2020, and the year-over-year increase for 2021 is 7.1%.

Food prices rose 0.5% in December after climbing 0.7% in November after climbing  0.8% in October and 0.9% in September.     In the past year food prices have risen 6.0%.  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.  In the case of food, “severe drought” conditions exist in 64% of the western region of the U.S.    It is hard to see how food prices are going to decline any time soon.

Energy prices fell 0.4% in December after having risen 3.5% in November after having jumped 4.8% in October.   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 29.6% as crude oil prices have now reached $78 per barrel.  Meanwhile, crude oil inventories are the lowest they have been in seven years.  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.

The core CPI for November 0.6% in December after climbing 0.5% in November and 0.6% in October.  After rising 1.6% in 2020 it 5.5% in the past year.

In December November  airfares rose 2.7% after having jumped 4.7% in November.   In the past year airfares have risen 1.4%.  Air traffic is still 15% below where it was prior to the recession.  As business travel gradually returns that will leave room for further increases in the months ahead.  Currently, airfares are now 18% lower than they were in February 2020 — prior to the recession.  Think they are going to stay there?  Highly doubtful.

Used car prices increased rose 3.5% in December after climbing 2.5% in both October and November.  Used car prices have risen 37.3% 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 climbed 1.0% in December after having risen 1.1% in November, 1.4% in October, and1.3% in September.  For the year as a whole new car and truck prices have risen 11.7%.  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 1.3% in December after having jumped 3.2% in November and climbing 1.5% in October.  Room rates have risen 27.6% 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 19.1% 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% after climbing 0.5% in both October and November.  This means the year-over-year increase now stands at 4.2%, but the pace is accelerating.  In the past three months rents have been rising at a 5.5% 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 and 5.5% last year.  We expect it to increase 5.2% in 2022.

Stephen Slifer

NumberNomics

Charleston, SC