The purchasing power of the dollar drops to a new record. The Fed makes its wishes come true
Inflation of durable goods + 3.3%. Food inflation + 3.4%. Inflation of services increases, but remains constrained by airfares, accommodation, event tickets, etc., until people start to travel and attend events again.
Through Wolf Richter for LOUP STREET.
The consumer price index rose 1.7% in February from a year earlier, the fastest year-over-year increase in 12 months, accelerating from stalling in April and May of last year. Goods prices are rising sharply, amid all sorts of shortages of durable goods after searing demand fueled by the stimulus, and food prices are also rising, according to data released by the Bureau of Labor Statistics today.
The most significant service price increases are being held back by battered discretionary services such as accommodation, air fares and tickets to sporting and entertainment events, sales of which have plummeted.
- Durable goods (blue line) represent 10.9% of the overall CPI (laptops, new and used cars, appliances, bicycles, etc.)
- Non-durable goods (green line) represent 26.6% of the overall CPI (dominated by food and energy). Soaring and collapsing energy prices caused the index to move significantly.
- Services (red line) represent 62.5% of the overall CPI (rent, health services, plane tickets, mobile phone services, etc.).
The CPI for services (red line) rose 1.4% from a year ago, remaining at the lower end of the pandemic range. This includes the rent, the equivalent of the owner’s rent, health services, insurance, but also plane tickets and haircuts. Over the past decade, it has grown mainly between 2% and 3% year over year, but has lost speed during the pandemic as demand for services related to travel, personal care, events and other areas dove. For example:
- CPI airfares: -25.6%
- CPI hotels, motels, etc. : -17.2%
- CPI admission to sporting events: -14.1%
Inflationary pressures will emerge in services, which dominate spending and the CPI, as services account for two-thirds of the overall CPI.
Some sectors of the service economy have been hit hard by the shift in spending from services to goods. And these industries have responded by reducing their capacity – and some providers of these services have shut down for good. When this change reverses, as people start buying airline tickets, staying in hotels, going on cruises, attending sporting and entertainment events, etc., this renewed demand will meet a demand. reduced capacity, creating price pressures that will affect the CPI for services.
The CPI of non-durable goods (green line) increased by 1.7% in a year, the biggest increase in 12 months, after falling during the pandemic amid collapsing prices for gasoline and other fuels. This category is dominated by the volatility of food and energy prices.
But gasoline prices are rising now. In February, the gasoline CPI was up 1.5% from a year ago. And food prices in February rose 3.6%. This includes food prices at employee sites and schools, where demand has slumped and prices have plunged 24.5%, although I’m not sure how to track prices accurately when so many establishments of this type are closed.
The durable goods CPI (blue line) rose 3.3% from a year ago, remaining near the peak of the pandemic price spike, amid reports of shortages, backorders, production delays and transport bottlenecks as no one ‘was prepared for the sudden and meteoric demand for durable goods since the spring.
This surge in the durable goods CPI includes the historic four-month rise in used vehicle prices, which soared 15% from June to October, but are now gradually declining. The used vehicle CPI was still up 9.3% year over year.
The surge in used vehicle prices was not the result of soaring retail sales – used vehicle retail sales have been below year-over-year levels for most of the year. pandemic, including in February, according to data from Cox Automotive.
Instead, the price increases are more likely the result of a change in pricing power at the dealer level, which has been documented by the Record Profit Growth Despite Steady Unit Sales at AutoNation, the largest group of auto dealers in the United States. And now consumers are willing to pay higher prices – those who can afford to buy.
But the method of calculating the CPI ensures that, even though used vehicles become more and more expensive each year, the value of the CPI index for used vehicles, after various highs and lows , has actually declined since 2000, thanks in large part to the infamous hedonic quality tweaks.
These infamous hedonic quality tweaks are also used to drive down the new vehicle’s CPI, which has been essentially stable since 1997.
The power of these hedonic quality tweaks is demonstrated by my now equally infamous price index which compares the new vehicle CPI (green line) to the prices of the F150, the best-selling truck in the United States, and the Toyota. Camry, the best-selling car in the United States (I am discussing the mechanics of these hedonic quality adjustments on new vehicles in detail here):
The politically incorrect term for consumer price inflation, which the CPI tracks, is “loss of purchasing power of the dollar for consumption,” and therefore loss of purchasing power of dollar-denominated labor. And the purchasing power of the consumer dollar fell to a new all-time low in February, according to BLS data today:
And now the Fed wants the dollar to lose its purchasing power even faster, and so the Fed wants the purchasing power of labor to decline with it. And from the momentum underway, it looks like the Fed will make its wishes come true.
Do you like reading WOLF STREET and want to support it? Use ad blockers – I totally understand why – but you want to support the site? You can donate. I really appreciate it. Click on the beer and iced tea mug to find out how:
Would you like to be notified by email when WOLF STREET publishes a new article? Register here.