There’s some good news in the bad inflation data

Arghhhh! Inflation is really bad right now. The annualized inflation rate jumped from 8.6% in May to 9.1% in June, the highest level since 1981. Everybody who drives a car knows skyrocketing gasoline prices are one of the principal culprits. Plus, food prices are up 12% year-over-year, leaving families little choice but to shell out more for essentials.

There are also signs that some types of inflation are running their course, as consumers adapt and pandemic-related supply-chain kinks unwind. Since last year, Yahoo Finance has been tracking inflation by categories that matter most to consumers, ranging from fuel to appliances to health care to college tuition. We’ve now organized that data to show inflation by category over time, which reveals where inflation is getting worse, where it’s getting better and where it hasn’t really been much of a problem during the last year or so.

The first chart below shows how inflation in all of the categories we track has changed since last October. The chart is too cluttered to track each category precisely, but it’s clear that gasoline stands out as the product with the most inflation. Several wavy lines also show the price volatility in certain products since last fall, with inflation falling sharply in some categories and spiking in a couple others. We list all the categories we track on the right-hand side, in descending order based on the annual inflation rate for each category in the latest data.

Automobile-related inflation is easing

The second chart separates out six categories where the rate of inflation has dropped significantly in recent months. (Click the arrows in the upper-left-hand corner to scroll through the charts.) Three of these categories are related to automobiles. New and used-car prices were shockingly high earlier this year, with the price of new vehicles up 12.2% percent in January and the price of used vehicles up an astounding 40.5%. That has contributed to the rising cost of transportation overall. Prices of new and used cars are still rising, but the annualized inflation rate has dropped to 11.4% for new vehicles and 7.1% for used. That suggests supply problems relating mainly to a shortage of computer chips are improving. If this trend continues, we could see vehicle prices decline at some point during the next several months, which would show up as negative inflation.

That has already happened with rental cars. Last October, the cost of a rental car was 39.1% higher than a year earlier. Rental-car inflation has consistently eased since then, with the cost of rental cars in June 7.7% lower than in June of 2021. Prices are dropping because rental agencies that slashed inventories in 2020, expecting a long COVID recession, have now rebuilt their fleets. Hotel inflation is drifting back as well, as the industry copes with staffing problems. We included tech hardware and services on this chart because inflation turned negative recently, with prices down 1.2% year-over-year.

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The bad news is pretty bad

That’s the good news. There’s plenty of bad news. Our third chart shows where inflation is getting worse, not better, and while we’ve only included a few categories, they’re ones that account for a big chunk of the family budget. Everybody knows about pain at the pump, but there’s also pain at the thermostat, with household energy costs up 21.9% year-over-year. The typical family spends 2.6% of its budget on gasoline and 6.8% on household energy. Gas prices get way more attention, but inflation in energy used at home actually hurts more.

Housing costs, which include both rent and homeownership, are up 7.3% year-over-year, which is less than overall inflation. But housing accounts for 35% of the family budget, so even small increases can cause big headaches. Groceries, accounting for 8.1% of the family budget, are up 12.2%—another pernicious problem, since everybody needs food. We also included airfare on this chart, because of the big price hikes in recent months. That’s less worrisome however, because a lot of air travel is discretionary and history shows people will cut back drastically if they have to.

Our final chart shows some important spending categories where price hikes have been well below the average rate of inflation, including medical care, prescription drugs and college tuition, which until recently rose by a lot more than average inflation, year after year. The main point here is that inflation isn’t everywhere.

We compare price hikes in all these categories with the average rate of inflation, but it’s also important to compare them with average wage growth, which is 5.1% year-over-year. With inflation at 9.1%, the purchasing power of the typical worker is declining and people are falling behind. When the cost of anything goes up by more than earnings, it’s an “inflation tax” that erodes living standards. This goes a long way toward explaining why consumers are extremely gloomy, even though the job market remains strong and we’re most likely not in a recession.

The red-hot question on inflation right now is whether 9.1% will be the peak, with the pain receding in coming months, or whether inflation is going to get even worse. On energy, the outlook is favorable. The latest numbers reflect data from June, when gas prices hit the highest levels ever and the Russia-Ukraine war was adding a sharp premium to oil and natural gas prices. Energy prices have dropped sharply since then, which means retail prices should be considerably lower when the July and August data arrives. That could be fleeting relief, however, given that sanctions on Russian energy exports are likely to get a lot tighter through the end of 2022 and into 2023.

Energy inflation also contributes to price hikes in other categories, since it takes fuel to produce and deliver food and manufactured products. So the direction of energy prices will have a major influence on overall inflation. It’s probably a safe bet the inflation rate for July and August will be lower than 9.1%. But before the COVID pandemic exploded in 2020, inflation was only running around 2%. Getting back to that is in nobody’s forecast right now.

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