Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
We found out on Wednesday that the Consumer Price Index for December was 7% higher than a year ago. This was in line with estimates, but marks the highest annual increase in almost 40 years.
If you want to see something really scary, look at the jump in inflation last year. It started at a 1% rate in January, had crossed 4% by April, and finished the year at 7%. During most of this time, the Federal Reserve stood on the sidelines doing nothing except calling it "transitory." The recent reduction in their bond purchases has yet to slow the surge in prices, so expect rate hikes starting some time after March.
Some of you may say that the headline CPI number isn’t as important as core CPI—which strips out volatile food and energy prices. I don’t agree, as Americans need to eat and heat their homes, but even core CPI is up 5.5% over the past year.
Which prices rose the most over the past year? Great question. Here you go:
Gasoline – 49.6%
Natural Gas – 24.1%
Used Cars and Trucks – 37.3%
New Vehicles – 11.8%
Food – 6.3%
We also found out last week that wages have risen by 4.7% over the past year. That might be considered good news, until you realize that prices rose by over 7% during that time. So, your 4.7% raise just became a 2.4% pay cut. Thanks a lot, Fed!
These rising prices are pushing American families further in debt, with the average family now owing $155,622. That’s 6.2% more than last year.
To make matters worse, yesterday we received the latest data on producer prices, which rose 9.7% last year. That’s a record annual gain—although to be fair, the data only goes back to 2010.
There are two sides to inflation: the supply side and the demand side. While the supply issues we’ve had since the start of COVID-19 will abate over time, we can’t say the same for demand. When you increase the money supply by 40% since the beginning of the pandemic, you are going to have inflation sticking around a lot longer than the Fed (but not me) ever thought. Don’t believe me? Look at this chart of M2 going back to 1980, and tell me if you see any declines.