Macro Analysis

Macro Focus: US Consumer Prices in perspective

The latest reading of the US Consumer Price Indexes for June compiled by the Bureau of Labor Statistics showed how the double impact of a surging US and global demand and lingering supply side constraints translated into turbo-charged consumer prices. In this article, we analyse in detail the latest CPI figures and elaborate on their potential path in the coming months.

US Consumer Price Index-June 2021: key findings

As reported by the U.S. Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in June on a seasonally adjusted basis after rising 0.6 percent in May. This was the largest 1-month change since June 2008 when the index rose 1.0 percent. Over the June 2020/2021 year-on-year period, the All items index increased 5.4 percent. It was the largest 12-month increase since August 2008.

The price index for all items less food and energy increased by 0.9 percent in June after rising 0.7 percent in May. Perhaps more tellingly, the index for all items less food and energy rose 4.5 percent over the last 12 months, the largest 12-month increase since November 1991.

The index for used cars and trucks sharply increased for the third consecutive month, rising 10.5 percent in June. This was the largest monthly increase ever reported for this index, which was first published in January 1953. This increase accounted for more than one-third of the seasonally adjusted all items increase. On a year-on-year basis, the index for used cars and trucks increased 45.2 percent, the largest 12-month change ever reported for that index.

Looking back in historical perspective, core consumer prices increased at a pace last seen in the early 1990s. At that time, the end of the Cold War, the reduction of the US twin deficits and China's accelerated transition to a market economy all contributed to fuel a secular desinflationary trend. This time around, some analysts argue we have entered the age of slowbalization and increased rivalry between major global economic powers - in a nutshell, this is what we call multipolarity. Trade frictions are likely to increase in the future and governments' addiction to monetary financing is fuelling the debate about monetary debasement amid a tech-driven revolution in the financial and monetary spheres.

However, as it is said in The Hitchhiker's Guide to the Galaxy: Don't panic! An analysis of price changes by broad expenditure category and by item versus the pre-pandemic baseline helps making sense of the underlying dynamic and dispel some misconceptions.

A review of consumer prices by expenditure category on a YoY vs. % Pre-COVID baseline

Transportation related goods and services have contributed most to the increase in headline and core inflation figures. As reported by the BLS, the index for new vehicles rose 2.0 percent in June, that index’s largest 1-month increase since May 1981. The motor vehicle insurance index increased 1.2 percent over the month. The index for airline fares rose 2.7 percent in June after increasing 7.0 percent the previous month.

In order to make sense of the underlying momentum, it is important to put it in perspective by comparing the year-over-year price changes with the (annualized) changes since February 2020, just before the outbreak of the COVID-19 pandemic in the United States. In this respect, we can see that motor fuels and motor vehicles - both new cars and trucks and used ones, with a special mention for the latter - have seen their prices rise at meteoric rates. The price increases of these "usual suspects" is largely related to a surging stimulus-boosted pent-up demand, amid supply constraints that have hampered cars productions in the first months of the recovery. Although it is difficult to get timely manufacturing data, there are anecdotical signs that show that the microchips shortage that has been to a large extent responsible of the impaired car production volumes, the lengthened car delivery delays and the subsequently higher price tags is starting to wane.

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