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Do You Remember When and Would You like to Do It Again?

June 19, 2021
Inflation, better known by economists as CPI (Consumer Price Index), has been making the headlines lately. The last time we experienced inflation over 2% was in 2008 and the last time we experienced this as an economic environment was from 1968 through 1981. Most Baby Boomers remember this period. Not fun! There is true erosion of one’s purchasing power in an inflationary environment. Are we headed for a stretch of inflationary years again? The Federal Reserve changed one of their mandates last year from meeting a 2% inflationary level to averaging a 2% inflationary level. What do you have to do to average? You have to go over it for a period of time. Is the Federal Reserve worried about where we are currently? They don’t seem to be. Should we be concerned? We don’t think so, at least not right now, and here is why.

We are unwinding from a significant shock to our global economy. Last year with COVID we struggled to find toilet paper and hand sanitizer. Now, these are easily obtained as we emerge vaccinated and mask free to different needs and wants. Due to a multitude of reasons, many segments of the economy are still experiencing shortages in materials and labor. This is leading to dramatic cost increases in these areas. Other areas, not so much. Most economist believe, as the Federal Reserve has stated, that this is transitory and the economy needs time to work some of this out.

Rick Newman of Yahoo Finance provides some additional information on this topic in the article below.

ARTICLE HIGHLIGHTS:

Inflation Isn’t Everywhere

Inflation has hit the highest level since 2008, when gas prices exceeded $4 per gallon. Overall prices are up 4.9% during the last 12 months, with the biggest jumps in pandemic-affected parts of the economy. A shortage of semiconductors needed for new cars has pushed used-car prices up 30%. Transportation costs, driven by rising airfares, are up 20%, with volatile gas prices up 56%. Surging demand for real estate has pushed home prices up 13%, with many buyers shut out completely.

Consumers have clearly noticed, with inflation expectations rising, according to the New York Federal Reserve. What consumers may not have noticed, however, is that there’s little to no inflation in important parts of the economy, with Americans getting a break on some costs to help offset rising costs elsewhere.

The cost of medical care, for instance, has risen just 0.9% during the last year. That’s a sharp slowdown from the average of 2.8% during the last 10 years, and 4% in a few years. College tuition is up just 0.3% during the last year, compared with an average 2.7% annual increase during the last decade.

Home prices soared during the pandemic, spurred by historically low interest rates, strong demand and a shortage of new homes. But renters have been getting good deals, with average rent rising just 1.8% during the last year. In cities such as New York and Chicago, rents have dropped as people fled to more open areas, either temporarily or permanently.

Day care and preschool costs are up just 1.6%. Personal care services are up by the same amount. Educational costs, including things like books and supplies, are up just 1.9%. And technology, including computers, smartphones and Internet service, is flat, with just a 0.1% annual price change.

'Transitory factors'

These odd inflation disparities reflect the ongoing disruptions the pandemic wrought on the global economy—and suggest inflation is a temporary phenomenon, not a long-term worry. “Transitory factors are driving prices higher right now,” economist Evan Karson of Moody’s Analytics wrote in a June 11 report. “We do not anticipate inflation of this speed to be the new norm. The economy’s reopening is a one-off event that is lifting prices of most leisure services, including admission tickets, airfare, hotels and rental cars.”

In some ways, these scattershot inflation surges may not be as painful as the numbers make them sound. Many car shoppers can put off a purchase until more supply comes online and prices moderate. Leisure travel is discretionary. And the expenses people have to pay—rent, school costs, medical care— are things that have gone up the least. The one exception is gasoline, now around $3.10 per gallon. Still, that's within the range of the historical average for the last 15 years.

The lumber market may foretell where pandemic inflation is heading. Lumber prices hit record highs in May, due to supply shortages, strong demand for homes and a national remodeling binge. But prices have plunged 40% in just a few weeks and seem headed back toward normal levels. Since the surge in prices was adding as much as $36,000 to the average cost of a new home, the normalization of lumber prices will spell relief throughout the economy.

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AUTHOR:
Rick Newman
Yahoo Finance | June 15, 2021




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