Inflategate Strikes Again

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Inflation is getting so bad Arizona might have to raise the price of its iced tea above $0.99.

Okay, it’s not that horrific yet, but consumer prices did surge 5.4% in June from a year ago, the biggest increase in 13 years.

What happened: As the US reopened for business, consumers swiped their credit cards with fury. Combine that with supply shortages across the economy and massive government stimulus, and you get sweeping price increases.

But there are nuances

The WSJ’s David Harrison divided the inflation report into four categories to show that price hikes aren’t occurring uniformly across the economy. In some sectors…

  • Prices that plummeted early in the pandemic and are surging to catch up. Think airfares (24.6% annual increase in June) and hotels (16.9%).
  • Prices that are booming thanks to supply shortages. Used cars are the star of this category, with their price increases accounting for more than a third of June’s total price hikes. Economists expect prices to return to normal levels when supply chain wrinkles are ironed out.
  • Prices that will remain higher permanently. You could be paying more at restaurants over the long term thanks to an extended labor shortage and higher wages.
  • Prices that aren’t increasing that much. Rents are inching upward at a rate of 1.9% per month. For comparison, rents on a primary residence rose at a nearly 4% rate before the pandemic.

As always with inflation stories, we must close by turning to the Fed, whose main job is to keep prices stable. Will June’s inflation boom change Chair Jerome Powell’s view that price hikes are transitory?

Probably not. As we mentioned, the bulk of the price increases were in sectors battered by the pandemic (hospitality) or those battling supply shortages (used cars). Higher inflation might stick around a little longer than initially expected, but investors are betting more typical price growth will return, just like the handshake.

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