Transitory Price Increases Once Again Drive Headline Numbers
Prices for used cars increased by a month-over-month 10.5% in June, crushing the American economy and forcing citizens who rely upon eating used cars for daily sustenance to question whether they should buy enough used cars to last them through the end of the year before their price climbs again. Over the past year, prices for used cars have increased 45.2%, causing riots at used car dealerships nationwide and sparking speculation whether capitalist democracy can survive in these United States.
Of course, nothing of the sort occurred. The Consumer Price Index for All Urban Consumers rose again in the month of June by .9%, bringing the 12-month inflation rate to 5.4% (4.5% excluding volatile food and energy from the index), and driven by increases in prices for consumer discretionary goods that they haven't been able to enjoy during the economy's forced shutdown and which everyone now wants to consume: plane tickets, taxi cab rides, hotel rates, fancy dinners.
Prices for used cars are also high, primarily for two reasons: first, in periods of economic uncertainty or recession, demand for used cars increases as households reduce spending on new cars; second, supply chain disruptions due to semiconductor and other parts shortages continue to keep the available stock of new cars lower than normal. These two dynamics--unavailability of substitutes, and increased demand--combine to force prices for used cars to increase. Less these factors, the increase in the general price level is to be expected, given the base effect--the impact of measuring year-over-year changes when the two years under examination are so dissimilar in terms of their levels of supply and demand--and an economy in early stage expansion.
Worrying to us here at goodstead, however, is the change in energy and food prices. Because these are so volatile, common measures of inflation exclude them to illuminate what is referred to as "core inflation"--supposedly a more accurate measure as it eliminates the typical aforementioned outliers. Still, energy and food constitute large proportions of the average household's expenditures, and therefore have an outsized impact on inflation psychology. We'll continue to monitor changes in these categories not only because they are easily transferred through to the consumer via the cost of other goods, but because of the sensitivity of the household to changes in their level. Working families need fuel to get to work, and food to feed their children. Their psychic importance is not to be underestimated.
All that said, when viewed as a two-year average, the change in the price level is unalarming and on trend with prior periods. The Federal Reserve's preferred measure of inflation, The Personal Consumption Expenditures (PCE) index, tells a similar story: relatively stable, if slightly declining, inflation through the beginning of the pandemic, followed by a year of incredibly low inflation, then by a period of high inflation. As you can see from the chart below, inflationary pressures have already begun to dissipate.
Lastly, to add some historical perspective, inflation remains quite subdued compared to the last spike the American economy faced during the highly inflationary 1970's - 1980's. Below we reproduce the Trimmed Mean PCE Inflation Rate, which is the PCE Inflation Rate shown above, but adjusted for outliers and reweighted according to its new composition. It has been shown to be a more reliable measure of core inflation than the CPI-less-food-and-energy measure commonly cited as a measure of core inflation. As you can see, overall inflation remains low historically, and although on an uptick, is still range-bound. Should that change, you'll hear about it from us.
goodstead's Roadstead portfolio of safe haven assets is well-positioned for an increase in inflation, as its inflation-protected bond and gold positions are effective hedges against inflationary forces; our Whaleroad portfolio is similarly positioned to preserve value during periods of high inflation given its real estate, commodity and equity exposure. As we do not believe we can tell the future, we maintain these positions as features of our standard portfolio should we be wrong about the direction or magnitude of changes in inflation. For the meantime, we do not believe that long-term inflationary forces are building in the economy.