It has been a couple of months since we last looked at inflation. Back in June, we looked at the May inflation statistics. In that article, we looked at both the current inflation numbers as well as projected out what the remainder of the year could look like.
This time around, we want to review the newest data and also see how our projections fared over the last two months. Our projection was fairly conservative and was less of a forecast and more of an example.
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July Inflation Stats
In this article, we won’t go into detail about how inflation is calculated. The only thing you really need to know is that it 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 for it 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?
- Insurance Coverage and The Effects of Inflation
- How Will Inflation Affect Your Retirement Income?
July saw the Consumer Price Index (CPI) increase by 0.5% on a month-over-month basis. That is a year-over-year increase of 5.4%. A couple of notable categories include food (+0.7%), energy (+1.6%), and gasoline (+2.4%). If we remove food and energy from the CPI calculation, July had a monthly increase of 0.3%.
The 0.5% increase in July comes after a 0.9% increase in June. The increase in June was the biggest monthly increase since June of 2008 where CPI rose 1.0%.
Another noteworthy change in the July report is the moderate increase in used vehicles (0.2%). This is the first time in several months where used vehicles didn’t increase markedly. However, over a 12 month period, they are still up 41.7%.
You can see the full report here.
Many people still seem optimistic that inflation is transitory. President Biden says inflation is slowing and it’s thanks to his economic plan. I don’t know that a monthly increase of 0.5% warrants such a statement.
In our June article where we looked at May inflation statistics, we gave an example of the potential CPI numbers we could see going forward. We said that it was unlikely that we would see huge increases in the year-over-year numbers for June and July. However, we said that August through December could see those numbers increase.
We assumed that from June until December that the monthly CPI increase would be 0.5%. Going back to the May report it would have made the CPI chart look like this:
Apparently, our example was a little too modest. June saw an increase of 0.9% and July now saw an increase of 0.6%. If we assume a 0.5% monthly increase for the rest of the year, the chart would look as follows:
If this example is accurate, 2021 would see an annual inflation rate of 6.7%. The last time we would have even been close to that was in 1990 when it hit 6.1%. The last time we had inflation higher than 6.7% was in 1981. We talk about this comparison more in the May Inflation Update.
The Federal Reserve’s most recent inflation projects are well below what we outlined above and currently sit at 3.4%
In normal times a sustained monthly increase of 0.5% would be very high. In the past, they would have aimed for around 0.2% or less. But we know that the new guidelines allow for inflation to run hot. Furthermore, according to the government, we need economic help because our economy is suffering. When the economy suffers we need to increase inflation. However, the economy is only “suffering” because businesses were forced to lockdown, and individuals were instructed not to leave their houses.
Yet, now that economies are opening and businesses are running again, they are having a hard time finding employees. There are currently more job openings in the US than there are people seeking work. Why? You may ask. Well, it might have something to do with them getting paid more to sit at home thanks to the government. Much the same is happening in Canada.
Lastly, if the economy is in a slump, how are Americans saving more now than during pre-pandemic times?
It will be interesting to see how the remainder of the year plays out. Will inflation continue at its current pace? With those in charge continue to say that it is all transitory and good? Will interest rates rise to combat inflation? Will there be more lockdowns that will cause the economy to stumble more? All lot remains to be seen. All we can do for now is ensure we have a good plan in place and stick to it.
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