June 14, 2021 — Inflation Takes Hold, Highest in 13 Years


US inflation figures came out last week; the highest in 13 years; with prices surging 5 percent in May. The increase was the largest since August 2008 when inflation was 5.4 percent.  The core inflation index (excluding food and energy) was up 3.8 percent in May, year over year, the largest increase since June 1992.  Big ticket items are the driving force, with cars, airfare, furniture and clothing up the most. Overall, prices are up 9.7 percent, annualized, for the last 3-months ended May.  But one must remember the numbers are artificially higher; the current data is being compared to pricing during last year’s pandemic when demand for goods and services plummeted. This base-effect is likely going to subsist through the summer, and then taper off in the fall.  Comparing May 2021 prices to those two years ago, inflation is 2.5 percent, not that much greater than the Fed’s target rate.

The labor market is also improving, with initial unemployment claims falling to another post-pandemic low last week. Job openings grew to 9.3 million in April, the highest since tracking began in 2000, with a widening gap between available jobs and people taking them.

The Fed seems to think inflation is temporary, and that could well be the case. As people emerge from pandemic lock-downs, they are willing to spend the extra savings they have accrued, but only in the short run.