Inflation Reports

Last week, the Federal Government released the Consumer Price Index (CPI) data for May 2021. The headline number of a 5.0% increase in prices from one year ago has the become the subject of many news headlines. Inflation is always a concern for consumers and especially for those on a fixed income and this brings up two questions:

• Is inflation really a long-term problem for the US economy and consumer as some of the media reports suggest?
• If so, what should the long-term investor do about it?

Long-Term Issue?

Our newsletter from April 2021 (click here to view) discusses inflation and the Federal Reserve’s policy about inflation. Since the beginning of April, the rate of inflation has increased. A little closer look at all of the categories making up the CPI number can provide some insight into whether we are seeing short-term or transitory effects on inflation or if it may become more persistent. Chart 1 below, shows all the categories that the US Bureau of Labor Statistics uses at to calculate the monthly CPI number. The categories are broken down into groups of food, energy, and all other items. When looking at these categories over the past 12 months, energy costs rose 28%. Other categories that saw high price increases were used cars and trucks, motor vehicle insurance, tobacco, and airline fares. When we look at some of these same categories in the May 2020 CPI report, airline fares were down over 28%, motor vehicle insurance was down over 14% and energy costs were down over 18%.

When looking only at the report for May 2021 without the context of the impact of the pandemic, it looks like inflation is a much larger problem than it may be. So far, much of the 2021 CPI data appears that most prices are adjusting back to pre-pandemic levels.

Chart 1: Consumer Price Index Categories Percentage Change, May 2021

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