From the BLS
The gasoline index declined sharply in June, falling 6.8 percent. While this decrease was the major factor in the seasonally adjusted decline in the all items index, the index for household energy declined as well. In contrast, the index for all items less food and energy increased 0.3 percent for the second consecutive month. The indexes for shelter, apparel, new vehicles, used cars and trucks, and medical care all continued to rise in June
A 0.3 percent monthly rise is an annualized rate of about 3.7% suggesting core inflation higher than the Fed’s comfort zone but well within mine. A 3.7% inflation rate would suit my ideal path of monetary policy nicely.
However, lets parse out what’s going on here. A major driver is the rise in the price of vehicles. New car price growth continued to be quite strong at .6%, while used car price growth continued to accelerate, all the way to 1.6%.
To put that in perspective 1.6% is an annualized increase of 21%. This is supports a general view that new car sales were operating well below sustainable levels over the course of the past few years. There is a lot of other data to support this, but the United States was simply building too few cars.
This is starting to show up most strongly in a shortage of used cars and hence the strong rise in price. What we expect to see is this push people into the new car market and thus increase industrial production. This is how the connection between inflation and output works in the real world.
Second we are just beginning I think to see the shelter component tick upwards. It continued to grow at 0.2% or about 2.4% annualized. This is a obviously not a big pace but shelter accounts for an enormous portion of the core CPI. Where shelter goes, so does the core.
I do expect to see this to continue to rise in the coming months as the apartment shortage begins to bite harder. This in turn will drive more construction, which may end the depression in that industry.
Bad news abounds but the fundamentals continue to move in the direction of increasing prices and output.
4 comments
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Friday ~ July 15th, 2011 at 12:14 pm
John
As a Keynesian, don’t you find it at all worrying that core inflation is strong when only 58% of the population is working (the lowest % since the Great Depression)? If all this slack can’t stop inflation, what will be able to if it gets out of control? I find it very worrying that so many people are out of work and we have 3.7% inflation and the monetary base is still increasing. What happens when the demand for money falls and the monetary base draws down and there’s still unemployment? No one is gonna like their policy options if that happens and it seems to be exactly where we’re headed.
Friday ~ July 15th, 2011 at 1:43 pm
Give Kids Savings Accounts
I have definitely been seeing an increase in the price of used cars, having been in the market for one for a few months now. Check out any sales flyer and you’re sure to see at least a couple of new car models priced LOWER than a same model 1 year old. It’s kinda scary.
Monday ~ July 18th, 2011 at 3:38 pm
Donald A. Coffin
Anecdotally (based on buying an actual new car last weekend), we discovered that prices of somewhat older, but new, Japanese cares are *higher* than similar models more recently assembled. The reason, according to the sales person (note: grain of sale needed here) is that the supply of *parts* for the older new cars is much more abundant (and was purchased at lower prices), while the availability f replacement parts for the newer new cars has been severely affected by the tsunami and associated production interruptions. This–if it is accurate–is likely also affecting the price pattern noted in the previous comment.
Saturday ~ July 30th, 2011 at 8:45 pm
Auto’s and the Economy « Exogenous Variation
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