Are the paralyzing effects of ‘70s stagflation back? Could we see multi-decade period of no economic growth à la Japan? Will prices spiral out of control Venezuela style? Tune in at 6!
There they go again! The media dolling out information without the proper context. Nowadays, it’s hard to open a website or listen to an economic report without hearing about inflation. Media commentators seem so sure of themselves. Interesting how they can talk about something without offering pertinent details. So, let’s do what the media doesn’t and peel back a few layers of this inflation onion.
There is no doubt that we are all paying higher prices. Interesting how much of the media is fixated on food and energy items. These are the items we purchase on a regular basis, making us more sensitive to food and energy price changes. However, food and energy prices are the most volatile (notice the wide ranged blue bars on the chart). Although food and energy are important, economists and investment professionals tend to take food & energy with a grain of salt and look past those items to gain a better inflation picture. Inflation without food & energy is referred to as Core Inflation, which offers a more solid inflation depiction.
In the current environment, there are clearly other causes for higher prices. The question is, “are the factors temporary or permanent?” It’s not an either-or question; it could be a combination. To answer this question, let’s peel off another layer or two and use a little deductive reasoning.
Upon closer examination, higher prices associated hotels, airfare and used cars have had a significant and disproportionate impact on recent inflation data. Pre-vaccine, there was clear evidence of building demand for travel and experiences after being house bound for close to a year. Such pent-up demand ended in a crescendo in warmer months. In late-spring and early summer, TSA passenger throughput equaled pre-COVID levels, planes were packed, and hotel rooms became scarce. (Dining away from home also experienced high demand and price increases, but that is part of the food component.) Car rentals also saw a big price spike, but that was short lived and has almost no weighting in the aggregate overall inflation number. Today, people are buckling down with summer winding down, preparation for normal autumn life and possible Delta restrictions.
Used car prices also saw a huge price movement recently. Nowadays, almost everything requires computer chips, including cars. Car manufacturers shuttered operations due to COVID and lack of orders. When operations re-commenced, there were not enough chips to build new cars, leaving car buyers to purchase previously owned (used) cars. The nearly fixed supply met higher demand driving up prices. This was an odd and unforeseen COVID repercussion, but it is no doubt a temporary issue.
Once layers of the onion are peeled back, it’s easier to see what really happening. Excluding food & energy and discounting the near-term travel/experience engorgement, what’s left is a better inflation profile. Admittedly, there are elements of enduring inflation, but not at the level suggested by the lackadaisical media.