cpi

June CPI came out yesterday at 5.4% and people are freaking out. But they are missing that CPI is being driving simply by car prices (which people can skip buying) and oil price recovering. Outside that, CPI is up … 1.7%.

Here’s a chart showing CPI, the contribution of the transportation component, which is oil products and car prices, and then CPI minus transportation.

You can see that CPI has risen rapidly in 2021, but you can see if you remove the transportation component, CPI overall has stayed the same.

In other words, CPI is due to car prices and oil. Oil is at $70 a barrel – nothing crazy. It’s just up huge since the crash in 2020. (Remember when oil was -$32?)

Car prices are high because of a shortage of chips. People can put off buying a car (and probably are) and those prices will come back down.

The bottom line is so far this is just a transitory inflation issue. People are too panicked about the top line number.

The Fed will speak today after its 2-day meeting. All ears will be on what they say about inflation. My guess? They will double down on transitory. Why? Current inflation is almost all due to gas prices and used cars.

Last month CPI was 5% year-over-year. I did a quick analysis breaking down where that 5% came from. Here are the results:

Of the 5%, 3% is due to “transportation” prices increases. Most of that is simply from oil prices going up (1.6%) and new and used car prices going up (1%). In other words, if transportation prices went up by 2% last month, CPI would barely be above 2%.

It’s also important to remember that this is just a rebound from depressed prices last year. Remember when oil was at -$32 last spring? In fact, the transportation CPI component in May 2020 was -11%.

The Fed is also unlikely to be worried about car prices. We don’t buy cars that often, we can delay purchases, and the shortage in computer chips will end.

Thus, the Fed is probably not too worried about the current 5% CPI level. Unless oil really takes off, in a few months, CPI will start to decline closer to the Fed’s 2% target.