July 22, 2021
Inflation Risk: US CPI Chart Shows a Leap. Is It Overblown?
Every week, Flexport Chief Economist Phil Levy offers a quick analysis of relevant public data for the global trade community.
See what the latest indices reveal and keep up with the facts and figures that could impact your business.
Here’s the take for the week of July 19, 2021.
This week, it's US CPI Category Inflation - June.
Source: Bureau of Labor Statistics.
For the month of June, the Consumer Price Index was up 0.9% over May on a seasonally-adjusted basis. It was the largest change for a single month since June 2008. The June 2021 CPI was up 5.4% from June 2020, the largest annual rise since 2008. The “Core” CPI index, which excludes the more volatile categories of food and energy, was also up 0.9% from May.
There is little question that the United States is experiencing unusually high inflation. The key question for economic policy is whether that inflation is transitory or building.
In Congressional testimony this week, Fed Chairman Jay Powell reiterated his view that the surge in inflation would pass—the view justifying the Fed’s continued expansive monetary policy.
There are several challenges to assessing the severity and durability of the inflation threat.
The first is figuring which inflation measure one wants to look at. CPI and Core CPI are two of the best known, but hardly the only two measures, and different measures give different readings.
Another measure, Trimmed Mean PCE, popular in monetary policy circles, puts annual inflation closer to 2%.
The differences have a lot to do with how one weights various sectors of the economy.
The chart above shows selected sectors which weigh significantly in CPI calculations. The bars show the annual percentage price change for the category. The numbers in parentheses show the percentage weight attached to the category in CPI calculations. The sectors shown add up to 89.9% weight.
The chart also shows enormous variation in price changes across sectors, from the 24.5% growth in energy costs to the 1.0% growth in medical care services.
The question for judging inflation risk is how much the price changes reflect a broader monetary problem, versus a passing sector-specific problem. Those who see the inflation surge as transitory will often point to a sector, such as new and used vehicles (cars) and note very particular problems, like access to semiconductor chips. If those problems subside and supply resumes apace, the expectation is that prices will fall off.
An additional point of contention is the extent to which annual numbers are being colored by the pandemic dip in prices in spring 2020. That effect is beginning to drop off. By June 2020, prices had recovered almost half the spring drop, making for a better comparison.