In June, inflation rose at the fastest pace in 13 years – a 5.4% year-over-year increase, and 0.9% increase from May. Used cars and trucks were responsible for one-third of the surge, with an 11% increase in June and 45% over the past year.
The main driver of June inflation is booming demand and businesses failing to keep up supply. Another reason is the recovery in prices of goods and services as we finally leave our houses. Air travel, hotels, rental cars, entertainment and recreation sectors notched some of the biggest gains. A statistical reason is that comparisons are being amplified by comparisons from last year, when prices were falling due to Covid-19. Compared with two years ago, overall prices rose 3% in June.
The White House and Fed also keep insisting inflation is "transitory." Officials argue that current increases should level off as car supply picks up and consumer spending returns to more normal patterns, companies rehire and expand capacity. Lumber is a good example here, its price spiked earlier this year but is already cooling off.
Short Squeez Takeaway: Whether inflation is really transitory is a key question for the US economy and the Fed's easy money policies aimed at revamping the economy through the pandemic. Fed officials expect inflation to decline to more normal levels (2%) over the next two years but a sustained large increase could result in the Fed's tightening policies earlier than planned.