CPI: Tug of War

The Wall Street Journal headline and sub-head tell the story:

US inflation rate accelerates to a 40-year high of 7.5%: Strong consumer demand and pandemic-related supply constraints continued to push up prices in January.

In January the overall Consumer Price Index (see chart below) demonstrated an accelerating rate of change not seen for a generation.

The volatile food and fuel categories were up again.

Food prices surged 7%, the sharpest rise since 1981. Restaurant prices rose by the most since the early 1980s, pushed up by an 8% jump in fast-food prices from a year earlier. Grocery prices increased 7.4%… Energy prices rose 27%, easing from November’s peak of 33.3%, but a jump in electricity costs was particularly sharp when compared with historical trends.

The Bureau of Labor Statistics provides details on price increases by category. Meat price increases have been a major contributor to overall increases in the food index (12.2 percent January to January for the meats, poultry, fish category).  But there is considerable variation by category.  For example, uncooked beef roasts have increased 19.2 percent while frankfurters have increased 2.1 percent.  Fresh fish and seafood have increased 12.7 percent while shelf-stable (usually canned) seafood has increased 0.8 percent. 

As I scan the variation within several food categories, I wonder – hypothesize – about the cost differentiation in terms of “industrial” versus “craft” processing and merchandising.  More craft-oriented approaches require more workforce investment at a time when covid-related absenteeism has been disruptive and labor markets have been volatile.

Both used and new cars have experienced significant price increases due to both high demand and constrained supply. New cars and trucks cost about 12 percent more than one year ago. Used vehicles are up 40 percent. Car and truck rentals are up almost 30 percent. Housing rent is up over 4 percent. Increases for most of the measured categories are running at four percent or less. But there are enough categories with much higher increases to drag the average for “core inflation” to 6 percent since January 2021.

Petroleum prices have a significant spill-over on fuel, chemicals, fertilizer, plastics, and freight costs. A tight labor market is generating wage increases. As noted again and again, there continues to be plenty of money in the pockets of millions to support high levels of demand. I don’t anticipate demand growth ahead. It is already plenty high. But I do expect demand to become more evenly distributed across sectors and categories. Can core inflation be tamed — to something under 4 percent per annum — by more balanced consumption? Will pent up demand (and available cash) continue to support high employment and even some wage gains? How much push? How much pull?