July’s inflation report has raised fears of runaway prices and an overheating economy. But Labor Department data shows most of the jump can be blamed on just three areas — housing, used cars, and gas.
Both used cars and motor fuel were 42 percent more expensive in July 2021 than they were at the same point last year. Housing costs were up just 3 percent, but had an outsize effect on top-line figures: Because shelter is so essential, it’s weighted more heavily by the government’s economists when calculating overall inflation.
Broadly, the Labor Department estimates costs have risen 5 percent over the past year.
On Capitol Hill, the sudden surge of inflation is reigniting old fears. “Concerns of inflation have been dismissed,” Sen. Chuck Grassley said earlier this year as worries about price increases started emerging. “This sounds too familiar to those of us who witnessed the stagflation of the 1970s.”
But this housing-and-transportation-driven price spike doesn’t match what the U.S. saw in the 1970s, where prices rose an average of 7 percent every year for more than a decade. That bout of inflation was driven by energy, with sudden plunges in oil imports raising fuel prices and inflation expectations.
Price hikes were also more broadly spread across the economy — in 1970, inflation for food, housing, transportation and medical care were all above 5 percent. Of these categories, only transportation is above 5 percent today.
This time around, experts say the current spate of inflation is driven by a combination of pent-up demand and supply chain bottlenecks, both exacerbated by the pandemic.
Emboldened by pandemic savings and stimulus checks, consumers are eager to spend on goods and services. At the same time, some industries have been slow to ramp up production, so prices have increased for limited supplies.
“There were a significant number of people whose income didn’t really drop but they were prevented from spending it as they normally would have,” said Marshall Reinsdorf, a former senior economist in the IMF Statistics department. “Forced saving could be part of the excess demand.”
A more apt comparison might be the end of World War II, when demand quickly returned to pre-war levels and supply struggled to catch up. After the war ended, Americans heaved a sigh of relief and went out to buy clothes, food, and cars that were luxuries just a year before. Booming demand outstripped supply and inflation surged from 4 percent to over 20 percent within a year. By 1948, inflation declined as suppliers returned to normal production levels.
Just as inflation was mostly transitory after World War II, experts suggest price hikes for items like used cars won’t last long.
Many rental car companies shed inventory last year during the pandemic, throttling the usual outflow of rental vehicles to the used car market. As markets return to normal, inflation will stem. Indeed, used car prices grew an average of 9 percent every month from March through May, but only rose a tame 1 percent in June.
Ultimately, the consumer price index only measures the cost of living for a hypothetical consumer, not the average American. If you aren’t in the market for a car, the rise in inflation is less relevant than for someone looking for a used vehicle.
Removing transportation and energy from the equation, housing and food dominate inflation. Housing costs are slow to show up in the CPI, though rising house prices and rental costs may warn of further inflation ahead. The rise in food prices is almost entirely driven by restaurants, where workers have been slow to return; prices for food prepared at home are up just 2 percent.
Though Covid-19 created supply chain problems, some disruptions are linked to older trends. Economists cited trade uncertainty created by the US-China trade war and systemic underinvestment in supply chain robustness.
“There’s a trade off between the robustness of your supply chain and the cost of your supply chain. People have tended to get costs down at the expense of robustness,” Reinsdorf said. “To some extent, we’re paying the price for that.”
