I would think at least a decent chunk of this is driven by supply chain disruptions; the new and used auto figures in particular seem to point to this. In my opinion, this is not really money supply driven, at least not entirely.
Third month in a row over the 2% target. Getting harder to use base effect.
Fed tapered QE last time unemployment was this low.
Still don’t believe shelter costs only up 2.2% YoY.
The economy showed continued signs of transitory inflation in May, driven by used car prices and transportation services. This report was pretty much in line with the April report. All items rose 0.6% and core prices rose 0.7% from April. Used car prices were up 7.3% on the month and transportation services were up 1.5%.
Excluding used car prices, all items were up 0.4%, which shows that price increases are still being driven by the lack of computer chips for new cars.
Transportation services price increases are a key sign that there is a backlog of goods to be shipped to market as the economy re-opens.
Shelter was a big question market coming into May. It comprises more than 30% of all items. Prices rose 0.3% vs. 0.4% in April. Investors are keeping a close eye on this in the coming months.
Core inflation for the month of May was 0.7% vs 0.9% in April, indicating that price increases may have peaked, although it is too soon to tell.
Year over year core prices rose 3.8% and all items rose 5.0%. While alarming at first, used car prices alone accounted for approximately 1 full per centage point of core prices and 0.8 for all items. Excluding used car prices, core inflation was approximately 2.8% and all items were approximately 4.2%.
Energy prices were flat versus April, but up 28.5% yoy.
Amazing how many comments here are saying this is transitory. There is no way.
Supply constraints will not be temporary. If anything they are getting worse due to Covid outbreaks in key exporters, cyber attacks and other Covid related disruptions. That’s not even counting China simply cutting off supply to hurt the US as part of the US/China escalation. They have a vested interest in driving up prices in the US so that people lose faith in the dollar and move into another China backed or world currency. This will take time to play out but the Chinese government will see this as way to expedite the process.
Wage rate increases are also extremely inflationary. Economists even going back to Marx have understood this as a primary driver. I’m a small business owner myself and I can tell you the labour shortages and subsequent wage increases are definitely NOT going to be transitory. Once they go up they are very hard to take away. The mainstream economists/Fed are underestimating how much people reevaluated their lives during the Pandemic (over 50% of the labour force became unemployed at some point!!). This has a massive psychological and sometimes debilitating effect. They are underestimating the extent to which people are unwilling to go back to shitty jobs with shitty pay and/or are finding different ways to make money (Crypto trading, Only fans, Hiring out their cars, Roll ups, living with parents while taking unemployment cheques etc. etc.) Listen to people on the ground and this is obvious.
Business owners will have to raise wages to compensate and we are already seeing this in the data. So we’re going to see cost push and also demand pull due to the rapidly increasing money supply. Fed has stopped releasing M4 money supply data once it started going stratospheric! That basically means that they are hiding the fact that it’s probably growing even more now. They are desperately trying to manage inflation expectations.
Another thing I already see on the ground anecdotally and also in the mainstream press is the “inflation mindset”. People are beginning to expect higher prices which will lead to even more inflationary pressure. I’ve heard lots of comments recently about classic cars from people saying, “I’m going to go and buy it now because I know it will go up in value.”
Mainstream commentators are saying that “well, the bond markets are suggesting inflation is transitory” due to the fact yields on US 10 Year Treasuries have barely moved based on this print of 5%. Nor have the equity markets reacted. But they are failing to take into account that the Fed and government now owns more than $10 trillion worth of US government debt!! That’s more than foreign countries. This means the bond market should be almost totally disregarded as an indicator of future inflation. Fed will buy no matter what so why would prices drop precipitously?
Its pretty obvious to me that inflation will continue to rise and become more out of control this summer until the Fed is forced to taper and possibly lower rates come October/September.
Left leaning economists tend to look at wage growth as the primary indicator, right wing/libertarian types tend to focus on money supply growth. Both viewpoints are screaming inflation.
If I had to guess I’d say they will use the inevitable mutation of Covid variants as an excuse for the tapering so people blame a downturn on that rather than the Fed. Covid cases will start to rise again at the end of the summer due to Covid variants evading vaccines and also the high levels of vaccine hesitancy in the US so I think this is when they will begin tapering.
This means markets will correct significantly. I’d say 30%+. The Fed will crap its pants again because they all know realistically they can’t taper long term because of the shear amount of leverage in the system. They will see the drop then go into another even bigger round of QE to prop everything up, probably going full Japan style and buying equities directly. Markets will then rise again and probably go even higher than they are now.
What this means for the average investor is, stay in cash right now. Don’t be fooled into the inflation mindset. Wait for the dip and buy in.
What’s the rate vs. 2019? Struggling to find that in any of these reports.
edit: NVM, 2.6% / year vs. May 2019.