Is the Fastest Inflation Since 2008 Transitory?

Consumer prices in May rose at the fastest annual rate since 2008, surging 5% from May 2020, Thursday’s Consumer Price Index data showed. It’s the biggest increase since the Great Recession. 

May’s CPI was 0.6% higher than April’s. Forecasters had predicted a 0.5% increase. 

“CPI dipped last year and specifically hit a low in May 2020, so the year-over-year comparison of May 2021 to May 2020 is naturally going to give a solid increase,” Lyn Alden, founder of Lyn Alden Investment Strategy, told Blockworks via email. “It’s pretty easy to get to a 3% CPI gain just from those base effects, for example.”

Supply chain issues and prices 

Supply chain issues exasperated by the pandemic have impacted prices globally. There’s been a manufacturing shortage for semiconductors, for example, which along with other factors have boosted auto prices. There have also been bottlenecks in shipping and surges in commodity prices, all of which are playing into these numbers and likely will not last long, experts agree. 

“We’re not going to see used car prices surging at the percentages that they’re surging, we’re not going to see airline prices continue to surge at the pace that they are now in the long term,” said Tom Essaye, founder of Sevens Report Research. “For a market that wants to go higher, and this is a market that definitely wants to go higher, it had all the excuses it needed, and that’s exactly what you saw happen yesterday.” 

The key question experts and consumers are asking is if these stronger-than-expected price pressures are only a transient trend tied to reopening or something we can expect to see extended. 

“To be honest, it kind of spooked me with how quickly everybody is just assuming that this inflation is indeed temporary, because I’m not sure about everybody else, but I don’t know how many businesses I’ve ever seen in my life decrease prices after they figure out that they can raise prices,” said Essaye. “We’ll find that out if it’s temporary in the next couple quarters.” 

Inflation running to high poses a risk for Wall Street and Main Street. If wages do not keep up with prices, Americans will face significant challenges. 

“We will probably start to see year-over-year CPI start to flatten out within a couple months,” said Alden. “However, wage increases and a tight energy market could still keep inflation rather elevated for a longer period of time. Because this is fiscal-driven inflation, how persistent inflation will be will depend in significant part on how persistent fiscal stimulus is in the years ahead.” 

The data’s impact

The S&P 500 gained 0.47% following the CPI data. 

“CPI data was not seen as ‘hot enough’ to affect Federal Reserve policy, which sparked a relief rally after weeks of sideways trade,” Essaye. 

The Fed is set to meet next week to discuss bond buying and interest rates. Chairman Jerome Powell has maintained for months that there will be no taper-talk until employment numbers are up and inflation is on track to meet their goals. 

The Fed has a 2% inflation target in mind. Its preferred index is the Personal Consumption Expenditures, which is closely linked to the CPI, but tends to run slightly lower. 

Wednesday’s Job Openings and Labor Turnover Survey (JOLTS) data likely also did nothing to ease Fed concerns. The number of open job vacancies hit an all-time high of 9.3 million, the report from the Bureau for Labour Statistics showed. The number of people who quit their jobs also reached a new high of 2.7% of total employment.

“For the Fed, nothing in that report is going to make them think that it’s not temporary, and that’s really the biggest thing,” said Essaye. “Nothing in the data that we’ve seen, not even the JOLTS report, which was an all time high by a huge margin, none of that is going to make the Fed rethink their current policy. That’s the reason the market reacted so positively to the data”