Inflation Hit a New 40-Year High in May at 8.6%

What’s the story?

• The Bureau of Labor Statistics reported Friday that the all items consumer price index (CPI) rose by 8.6% over the last 12 months through May. Inflation reached a new high dating back over 40 years to December 1981 and is more than four times the Federal Reserve’s target rate of 2%.
• May marks the sixth consecutive month with inflation running at 7% or higher during the preceding 12-month period. It rose steadily from 7% in December to 7.5% in January, 7.9% February, and 8.5% in March before dipping slightly to 8.3% in April and rising again in May.
• Month-to-month consumer prices rose 1.0% in May, an acceleration from the increase of 0.3% in April, and the second-highest increase of this inflationary cycle that’s only exceeded by the 1.2% spike in March.

What goods did prices increase the most for?

• Here’s a rundown of the common items which have seen the largest price increases due to inflation year-over-year (notable monthly changes in parentheses):
• Fuel oil increased 106.7% over the last 12 months (including an increase of 16.9% from April to May).
• Gasoline of all types increased 48.7% over the last 12 months (of which 7.8% occurred from April to May).
• Utility gas service (piped) increased 30.2% (including a 7.8% increase from April to May).
• Propane, kerosene, and firewood increased 28%.
• Lodging away from home increased 19.3%.
• Used cars and trucks increased 16.7%.
• Furniture and bedding increased 12.7%.
• Citrus fruits increased 16.1%.
• Beef and veal increased 10.2%.
• Pork 13.3%.
• Chicken 17.4%.
• Milk increased 15.9%.
• New vehicles increased 12.6%.
• Fresh vegetables increased 6.4%.
• Fresh fruits increased 8.5%.
• Tools, hardware, outdoor equipment, and supplies increased 11%.
• Coffee increased 15.3%.
• Fish and seafood increased 12.2%.
• Financial services increased 5%.
• Electricity increased 12%.
• Men’s apparel increased 7.8%.
• Cereal and bakery products increased 11.6%.
• Women’s apparel increased 4.9%.

What is inflation & how is it measured?

• Inflation is a measure of the decline of purchasing power for a given currency over time, which in the U.S. means that a dollar effectively buys less than it did in prior periods because prices rise.
• Inflation can be caused by imbalances of supply and demand in the economy. On the demand side, if there is strong consumer demand that suppliers are constrained in meeting through increased production, prices will rise. On the supply side, increases in production costs like raw materials or wages lead to those costs being passed onto consumers through higher prices for goods produced. 
• Fiscal policies can also contribute to inflationary pressures in the economy by increasing discretionary income for businesses and consumers. The government can attempt to stimulate the economy through transfers of cash to consumers and raising their discretionary income, or by increasing spending on things like infrastructure, both of which can cause inflation. It can also cut taxes that result in businesses spending more on capital projects, raising employees’ wages, and hiring new employees; or giving consumers more after-tax income leading to elevated demand for goods and services. 
• Additionally, the monetary policy of a central bank like the Federal Reserve can contribute to inflation when it lowers interest rates to expand the money supply and thereby stimulate more spending by businesses and consumers.
• The most common way inflation is measured is through the Consumer Price Index for Urban Consumers (CPI-U), which shows changes in prices paid for a “representative basket of goods and services” by an urban consumer group representing about 93% of the U.S. population.
• CPI-U includes food, energy, commodities like cars and clothes, plus services such as rent and healthcare; and the relative importance of each to the overall basket shifts according to its proportion of all spending in a given month. This overall number is known as “headline” CPI, although economists also track a metric called “core” CPI which excludes food and energy because those categories tend to have more volatility.
• Inflation can also be measured through the Producer Price Index (PPI), which measures prices for inputs and expenses incurred by producers and suppliers of goods. If producer prices rise, it can eventually cause the CPI to rise as those higher prices are passed onto consumers.
• The Federal Reserve aims to keep inflation at about 2% as part of its dual mandate of promoting stable prices and full employment, as a modest amount of inflation is viewed as an optimum policy in terms of encouraging consumer spending without penalizing savings and investment. When inflation starts to get out of control, the Fed raises interest rates to encourage more savings and less consumer spending.

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— Eric Revell

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