• Dimitri Petit-Frere

Economic Update – Monday, July 19, 2021

  1. Cost of living has seen a substantial rise over the past year and most Americans are starting to worry, should you?

  2. Supply chain issues continue to impact producers and in return the consumer as well.

The Cost of Living is WAY UP!

The Cost of Living seems to have undergone the largest increase since 2008. According to the Bureau of Labor Statistics, the Consumer Price Index increased 0.9% last month. More than one-third was due to the rise in prices for used cars, while prices for food and energy rose sharply. Prices have risen so fast since 2008 when oil reached a record 150 a barrel. After huge gains of 7.3% and 10%, the cost of used cars soared to a record 10.5% last June. However, these price increases will not last. Automobile manufacturers are racing to produce more cars and trucks, and eventually, the used vehicle market will return to normal. Inflation was also caused by a 2.5% increase in gasoline prices last month. Gas prices have risen by 45% over the past year, as you can see at the pumps. Worse, the largest increase in food costs since 2011 is even more alarming. The largest increase in food prices since 2011 is a sign that inflation is spreading further through the economy. However, most of the rise in consumer prices in last month was concentrated in goods and services that saw sharp drops in prices in the first stages of last year’s coronavirus pandemic.

The prices of air tickets, hotel rooms, and restaurants are all increasing. Inflation in the twelve months ending June rose to 5.4%, from 5%. However, the economic recovery has brought about higher inflation. Inflation is a problem for businesses as they can’t find enough labor or supplies to keep up with the surge in sales. This forces them to charge higher prices for almost everything. They then pass these extra costs on to customers. Federal Reserve repeatedly called the sharp rise in prices “transitory”, and predicted that inflation would fall to 2% by next year. Minutes from the Fed’s recent strategy session indicate that inflation may stay higher than expected for a longer time. Is the “transitory? debate now over? It is not over, but the transitory debate continues. It’s likely that it’s gotten even hotter.

Producer Price Index

In June, the Producer Price Index rose 1.0%. Contrary to the CPI, June’s Producer Price Index (or “PPI”), rose 1.0%, an increase of 7.3% over the previous year and the highest in more than a decade. As you can see producer prices continued to rise at an unprecedented pace, the second-fastest monthly rate in over a decade. Economists had been asking for answers about whether the Fed could infuse 2% inflation. Now, they are asking if they can stop prices rising too quickly and too far after the financial crisis. Worse, prices have risen at 10.6% annually over the past six months. Details for June show that prices for services led the overall index to rise 0.8%. While prices for goods increased by 1.2% faster, the Producer Price Index weights services more than twice as much. Final demand trade services saw the largest increase. This tracks margins received by wholesalers and retailers. Although prices for producer inputs have risen, they still have the pricing power and ability to pass those costs on to consumers. This is evident in auto retailing where there was a large supply/demand mismatch and consumer cash to spend. Margins were 10.5% higher in June. In June, goods prices increased 1.2%. This is the fifth consecutive month of an increase of at least 1% in the past six months. Food prices increased 0.8% and energy prices rose 2.1% in June. These two volatile components are removed and core prices increased 1.0% in June, while food prices rose 0.8%. Core prices have risen 5.6% over the past year.

Bottom line: The “supply-chain”, or extensive, issues that continue to impact prices are a major source of pressure. There is no end in sight. The shortage of semiconductors has caused production to slow down, as well as difficulties in finding labor to fill record-breaking job openings in the US. Supply simply has not kept up with demand. Although the Fed continues to claim that inflation is temporary, it’s becoming more difficult for the Fed to manage these rising prices.

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