Key Takeaways:

• Index is 6.2% above a year ago
• It marks the 11^th straight month of higher prices
• Inflation for Housing, at 8% higher than a year ago, exceeds the overall rate

By Manuel Gutierrez, Consulting economist for NKBA

Consumer prices continued their upward march in October, rising for the 11^th straight month. The current Consumer Price Index (CPI) is 6.2% higher than a year ago, with the pace of gains the strongest in over 30 years. Figure 1 illustrates that although inflation has historically been much higher in absolute numbers, it’s the recent spike that is jarring.

For the last few months economists have been warning that based on continued rate gains serious inflation was looming on the horizon. At the same time, the Federal Reserve Bank, which has maintaining price stability as one of its main objectives, has stated that the price increases were “transitory” without defining what that meant. Clearly, after 11 months of gains, it is no longer a transitory situation. Massive government stimulus in the form of trillions of dollars being pumped into the economy to offset the pandemic’s economic fallout are taking their toll.

Consumer prices have logged their 11^th consecutive monthly gain which has led to the largest annual spike in over 30 years.

Over the last year alone, the Fed has increased its “balance sheet” by more than $3.5 trillion. This came in addition to the $2.0 trillion which it created at the heels of the 2007-09 recession. Such large infusions of cash in the economy, regardless of whether the Fed calls it quantitative easing or purchasing Treasury bills or mortgages to stabilize the markets, has the impact of increasing the amount of money in circulation. This leads to higher prices.

The CPI is an average of prices for 200 product categories divided into eight major groups. Each individual category includes a large number of products. The food category, for instance, consist of a variety of subgroups such as beef, butter and condiments.

Price fluctuations obviously vary by specific products, based on supply and demand and the availability to secure alternatives. The index is an attempt to capture those changes.

Figure 2 illustrates categories measured that relate to the housing/remodeling industry. Since the vast majority of products involved in housing represent a small percentage of the average consumer’s budget, the Bureau of Labor Statistics only provides information for those listed in the chart.

Given the recent explosion in housing demand for both new and existing homes, it is not surprising that three of those groups have experienced inflation rates above the national average of 6.2%.

Most notably are the price increases for the Housing category, which includes rental and home-owning costs, utilities, and home furnishings. Increases for Housing are 2.2 percentage points above the overall CPI. The housing category represents over 40% of the typical consumer’s expenses.

The severity of current inflation can be seen in the bottom two charts, for Windows and Flooring, which had been falling for a number of months before each sharply reversed.

Figure 3 displays the monthly and annual changes in prices for key categories and individual products.

Leading with highest increases on both an annual basis and for the latest month are Gasoline, Energy (which includes electric and gas used at home) and Used Vehicles. Gasoline prices have increased by nearly 50% since last October and are up by 6% in just the past month. Annual inflation for Energy is at 30%, followed by 26% for Used Vehicles. Gas and Energy inflation likely will continue to rise given the government’s mandate to switch from carbon-based energy to cleaner, sustainable forms. On the optimistic side, the cost of Medical Care has increased by just 1.3% during the past year, with Tuition& Fees only 1.8% higher.

Charts: