How Inflation Really Stacks Up

Back and forth between economists. Media headlines. Either inflation is about to be a runaway train or it’s maybe nothing to worry about, unless you’re buying fuel or building materials, maybe.

Reporting on inflation isn’t all that useful when the percentages tossed about like numeric salad with a light panic vinaigrette are unaccompanied by more context and comparison. Engaging but not intellectually nutritious.

To understand where things are now, even if not a promise of where they will be, we need to compare how numbers developed and what the total outcome has been.

The Covid-19 pandemic undercut many industries, including hospitality, travel, and energy, to name some of the hardest hit. Others saw a boom: housing prices, e-commerce, and logistics to get products to people.

The changing conditions helped set up how inflation plays out. For example, if prices dropped significantly–energy or transportation services, for example–following a fall in business, then an increase now as conditions improve will look like big signs of inflation, even if the prices compared to 2019 aren’t that high.

Here is the consumer price index table for May 2020 from the Bureau of Labor Statistics:

For comparison, here is the table for May 2021:

Look at the lines that exclude food and energy. In May 2020, 12-month consumer inflation was 1.2%. In May 2021, 3.8%. Higher, yes, but not that large in historical terms.

If you looked only at the overall energy category in May 2020, it saw an 18.9% drop, meaning what had cost $10 the year before would now have been $8.11.

May 2021 brought a 28.5% jump in energy. That makes the $8.11 of a year ago a current $10.42. Even larger swings have to include getting back to where prices were, which is why panic about inflation is premature for now.

There are other areas and other explanations. Notice used cars and trucks in 2021 are up 29.7%. A big reason is, again, a result of the pandemic. For a variety of reasons, there are big problems getting higher-end semiconductors. Cars use many of them throughout. Some big vehicle manufacturers have had to shut down areas of production. They can’t make a car or truck if they can’t get all the parts, and semiconductors are included.

With tight supply in new vehicles, people in need of transportation turn to used. Increase in demand brings a jump in prices.

Also, as I’ve mentioned before, there is no real single inflation number. Depending on your age, current life circumstances, geographic area, and so on, inflation for you can be far more, or less, than the official CPI, or consumer price index, measure.

This is one reason the construction market is in such pain. Prices and availability of wood, steel, wallboard, copper and PVC piping, cement, and paint make building tough to keep on track and expensive to do. If you’re a builder, you see a big increase in the cost of doing business.

But if you’re not a builder, or a person or company who needs construction done, these leaps in cost get diluted and aren’t a big issue for you.

Yes, there is more money that’s been created and out there. But is it going to buy things or to park in paying off debt, investments, savings, or some other form where it isn’t being used by a lot of people to buy stuff and services over and above what they already need?

The future is murky. Anyone who claims to know exactly what will happen should be only believed if all their previous takes on the economy were accurate. That leaves pretty much no one. Including big names in economics who have been warning of doom and gloom–as well as those who say nothing could go wrong.

If you’re worried about inflation, then talk to a financial advisor (also not a bad idea if you’re not). But this is a time to remain level-headed and clear-eyed.

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