Key Takeaways:
- Inflation is expected to accelerate in the coming months due to continued high government spending and strong consumer demand.
- Gasoline leads all categories, up 42% year-over-year.
- Housing is pacing above the overall averages, up 6.5%, while appliances are 7.1% higher.
By Manuel Gutierrez, Consulting Economist to NKBA
Inflation cracked yet another 13-year record in September, as consumer prices rose 5.4% from a year ago. The increase in prices, which began in earnest in mid-2020, shows no sign of abating (Figure 1).
Until the middle of last year, the country had enjoyed very modest price increases since the 2007-2009 recession. Inflation dropped dramatically during and after that recession as a consequence of lower demand for goods and services.
The current inflation run is expected to accelerate further in the coming months for several reasons.
Consumer prices are up 5.4% year-over-year in September, the steepest rise in 13 years.
Government spending remains at high levels, which fuels inflation. The Federal Reserve Bank is maintaining its easy money policies, although its policy makers are showing signs of future restraint and talking about reducing their purchases of financial instruments.
Additionally, consumer demand remains very strong in the face of supply shortages for many products. The situation will only get worse unless supply-chain problems are resolved in the near future — which appears unlikely.
Current Fed policies in other areas, such as energy, are having a deleterious impact, too. For instance, the push against coal and fossil fuels for environmental reasons has restricted their supply, resulting in higher prices.
The building/remodeling industry is generally seeing higher inflation than the overall 5.4% for all products.
Figure 2 displays the few categories in the construction industry specifically identified by the Bureau of Labor Statistics, which collects and publishes price data. In three of the four charts, prices are above the 5.4% overall increase in the Consumer Price Index.
The comprehensive All Housing category (upper left chart, Figure 2) includes all products and services purchased by consumers for the upkeep and maintenance of their homes, whether owned or rented properties. Along with the other categories cited in Figure 2, it involves purchases of electricity, water, sewer service, products used for residential repairs or improvements and others. Total housing products are up 6.5% against the previous year — 1.1 percentage points higher than the overall CPI.
Figure 2 reveals that Total Appliances are up 7.1% from last year. Major appliances, not shown in the chart, have increased at a faster pace yet, with a 9.6% increase compared to their September 2020 levels.
Windows and Flooring have shown more moderate increases, 6.5% and 3.6%. respectively. These categories had been falling in previous months, which makes the turnaround even more of a concern.
Examining other categories of goods and services purchased by consumers, inflation is found to vary widely. The highest increase is for gasoline which, as consumers are painfully aware based on the frequency of purchases, are up an average of 42% over a year ago at this time. Energy used for the home is next, up nearly 25%, with used vehicles 24% higher compared with last year.
More encouraging, several categories are experiencing very modest price increases over the last 12 months. Medical care overall, including services such as doctor or hospital visits as well as drug purchases, is up just 0.4%. The price paid for financial services is nearly the same as last year, with a negligible 0.1% increase.
Looking toward the future, most economists believe inflation will get worse. Even theFed, which earlier had insisted that inflation was just a transitory phenomenon, has increased its projection for inflation to 4.2%. Just three months earlier, in June, its expectation was for a 3.4% increase.
