As the economy continues to rebound from the pandemic-related slump, inflation has recently been elevated to the highest rate since 2008, thanks in part to rising demand colliding with supply-chain disruptions and shortages of materials and labor. One item is a poster child for this phenomenon: Cars.
Modern cars need as many as 1,400 different computer chips, and lead times for the manufacture of such chips can be as long as 180 days. Protracted supply chain issues have caused a shortage of these chips, which in turn has caused a shortage of new cars. As a result, demand boomed for used cars, driving their prices through the sun-roof!
The Consumer Price Index (CPI) measures what consumers pay for goods and services, and is one of the primary ways we measure inflation. The rapid change in price of used cars and trucks has been responsible for one-third of the increase in the CPI in May and June.
The Federal Reserve is betting that elevated inflation readings will be temporary and mainly due to supply-chain bottlenecks and other effects of reopening the economy, and should cool over time as those temporary issues get resolved. July’s CPI measurement suggests they may be right, as the index for used cars and trucks significantly decelerated from the heightened levels of May and June.
This shows that one really needs to look under the hood on a current round of inflation—and understand that instead of some general phenomena, it is largely driven by idiosyncratic factors that should abate over time. So while we may not be able to park all our inflation concerns, we can certainly put them in Neutral.
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