This Surging Inflation Is Anything But Transitory

We got the May Consumer Price (CPI) Index data last week. Once again, it came in hotter than expected. In this article, we break down the data and show that this surge of inflation is anything by transitory.

In the first place, it’s important to remember that the CPI is reverse-engineered to mask inflation. It doesn’t really tell the whole story. But even half the story is pretty bad.

The projection was a 0.4% month-on-month jump in the CPI in May. The actual number came in at 0.6%. That’s 50% above expectation.

And the headline number was a 5% year-on-year increase in prices. That hasn’t happened since 2008.

The expectation for core inflation, factoring out more volatile food and energy prices, was for a gain of 0.4%. That number came in at up 0.7%. Year on year, core CPI was up 3.8%, the biggest increase since 1992.

Not only did all of these numbers come in higher than expectations; they came in above the upper range of expectations.

This was the first month this year that we didn’t see an increase in the rate of inflation from month to month. The CPI in January was up 0.3%. It was up 0.4% in February. It rose 0.6% in March and then last month it was 0.8%. But we don’t think this is the sign that the upward trend is going to reverse. We expect that the back half of the year will actually be a bigger increase than the front half.

If you add up the inflation increases through the first five months of 2021, it comes to 2.7%. If you annualized the number through the end of the year, the inflation rate would be around 6.5%. The real rate of increase is probably double that.

Even if the rate of inflation turns out to be transitory – meaning these CPI increases don’t continue into future years – we’re never going to reverse these gains. This is almost certainly a permanent reduction in the purchasing power of everybody’s savings and income.

Why do we think the pace of price increases will accelerate through the back half of the year?

A lot of companies have been reluctant to pass on their higher costs to the end consumer. By the end of the year, or as we get closer to the end of the year, a lot of companies are going to be under significant pressure to pass on these higher costs.

Just last week, Chipotle announced a 4% increase in menu prices to help offset its higher labor costs. Meanwhile, Campbell’s Soup warned it is going to miss earnings projections due to higher input costs.

Nevertheless, there are still a lot of inflation deniers who believe the price increases are transitory; this despite five straight months of CPI data coming in higher than expectations.

Every month they expect less inflation, and they get more inflation. Yet all of these people, who are so surprised every time we get an inflation number that’s much higher than they thought, they’re still clinging to the false notion that inflation is transitory. Well, the fact that they’re wrong every month — they’re just wrong in total. All the inflation is going to keep beating their expectations, including the fact that it’s transitory. Because the inflation that we’re experiencing is anything but transitory. it is only going to get worse.

The last time we saw CPI at this level was in 2008, on the cusp of the financial prices and the Great Recession. In a nutshell, this isn’t the end of the pickup in inflation as it was in ’08. This is like a launching pad.