Well, it’s the time of the month where inflation is reported. Before getting into the update has anyone else noticed the constant shift in narrative around inflation?
First, we are told, all this money printing, it won’t result in inflation. Then we had some higher than average inflation. Next, they tell us, “Oh, well don’t worry, we know what we are doing, and this inflation is just transitory.” We were highly skeptical of that, and rightly so. Now we have been told by Ms. Yellen herself that higher inflation and higher interest rates would actually be a plus from society’s point of view.
To see the update on last months report, click here.
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Inflation In May
In this article, we won’t go into detail about how inflation is calculated. The only thing you really need to know is that reported inflation is based on the Consumer Price Index (CPI). The CPI is essentially a basket of goods and services. The relative increase in the price of those goods and services is inflation.
If you want to read our other thoughts on inflation, search “Inflation” in the search bar on the right. Here are a couple of articles we have written on the topic:
- The Ongoing Inflation Façade
- Inflation is Higher Than You Think
- Is Hyperinflation on the Horizon?
- Inflation and the Cost of Education
- Insurance Coverage and The Effects of Inflation
- How Will Inflation Affect Your Retirement Income?
The May CPI for all urban consumers (CPI-U) increased by 0.6% in May compared to the 0.8% in April. The year-over-year increase in May was 5% before seasonal adjustments. That was above the projected year-over-year increase of 4.7% which is still significantly higher than the previous 2-2.5% inflation targets.
This year-over-year increase is the largest 12 month increase since the 5.4% increase in August of 2008. If the trend continues in the coming months, there is little doubt that we will see the year over year numbers continue to rise markedly.
If we look back at the last half of 2020, the monthly CPI increase are; 0.6% June, 0.5% July, 0.35% August, 0.25% September, 0.12% October, 0.18% November, 0.24% December.
If we look forward to the coming months, it is unlikely we will see a huge increase in the year-over-year number in June or July. That is unless both June and July 2021 have inflation above 0.5%.
However, if we look a little further ahead to August through to December, the story could be very different.
August Through December Inflation
Lets assume that the next 7 months average out to 0.5% inflation per month. What would the CPI number be each month and what would the year-over-year change be for each month?
Well that chart would look like this:
Assuming that constant 0.5% monthly increase, year-over-year numbers in the following months would be: 4.9% June, 4.89% July, 5.04% August, 5.31% September, 5.71% October, 6.05% November, and 6.32% December.
The last time we saw a calendar year with an inflation rate of more than 6% was in 1991 when it was 6.1%. Before that much of the 70s and into the 80s had annual inflation well north of 6%. You know what the federal fund rate was from 1969-1981? It ranged from 4.75% in two of those years (75, 76) and got as high as 18% in 1980 the year immediately prior to inflation rates finally starting to drop. Over that time period, the federal fund rate averaged 8.44%.
Would you like to hazard a guess as to what the federal fund rate is today? It is 0.25% and has been that way for more than a year and there is no plans on increasing it either.
Normally when inflation gets out of control or runs a little hot, governments and central banks will raise interest rates. As we have mentioned many times, interest rates and inflation have an inverse relationship.
May 2021 Report Highlights
There were a couple of notable categories. The first one being used vehicles which saw an increase of 7.3% in May. This is on top of the 10% experienced in April. For the second month in a row food increased by 0.4%. The 12 month increase of food is 2.2% but we could easily see that climb in months to come.
Although the energy category didn’t see an increase in May, the year-over-year numbers are staggering. Energy overall is up 28.5%, Energy commodities are up 54.5%, Gasoline is up 56.2%, and Fuel oil is up 50.8%.
Other notable increases came in apparel and transportation services. Each were up 1.2% and 1.5% in the month of May respectively. While there 12 months increases were 5.6% and 11.2% respectively.
Inflation is here. Another month where reported inflation was higher than expected. Yet, the narrative keeps changing. It started with inflation shouldn’t be a concern, money printing doesn’t cause inflation. To where we are now when we are told that inflation will be a positive for the economy. If we continue to see much of the same trend for the remainder of 2021 we could see inflation numbers that we haven’t seen for decades.
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