This week, the Federal Government released the Consumer Price Index (CPI) data for June 2021 and reported a 5.4% increase in prices from June 2020. This was the largest increase since August 2008. The most pressing concern is that the latest report follows a 5.0% increase from the report of the May increase and the possibility of persistent higher inflation than we have seen in decades.

After 2 months in a row of year over year inflation of 5% or greater, the officials at the Federal Reserve still view that the recent inflation increases as transitory and will eventually ease. Does 2 months make a more persistent trend for inflation or is it just a snapshot in time and not indicative of a long-term trend?

Transitory?

In our April Newsletter and our latest Blog post, we discussed some of the information that goes into the headline CPI rate. When looking at the categories of the economy with the largest percentage increases, it may provide some insight if inflation really is transitory or something more persistent.

For the June CPI report, energy and used vehicle sales rose sharply and were major factors in the total increase. Fuel oil rose 44% from last year and gasoline rose 45% contributing to a total energy rise of 28% from last year. Used vehicles rose over 45% from June 2020.

These could be alarming figures until they are compared to the same changes from 2020 when total energy costs decreased 28%, gasoline dropped almost 24% and used vehicles decreased almost 3%. When looked at with a longer-term view, the numbers are not as shocking.

The CPI increase of 5.4% last month is a real change of costs that consumers pay from last year. But the pandemic had a dramatic impact last year and several months had inflation rates of less than 1%. This can make price changes seem more dramatic than they really are. Chart 1 below shows the monthly year over year CPI percentage change since 2018. Most changes were around 2% until March 2020 when inflation dropped to almost zero. Since prices were lower last year, the increases can look larger this year as prices return more levels. The highlighted areas of the Chart below illustrate the highs and lows from during the pandemic to now as the economy rebounds.

Chart 1: Consumer Price Index Percentage Change, June 2021

So, are the higher inflation rates of the past few months really transitory as the Federal Reserve is reporting?

So far this year, we have seen some prices like lumber spike and then return to more normal levels. Airline fares and hotel rates, mostly within the US and Mexico at least, are now near 2019 levels. Many economists expect vehicle pricing to become more stable later this year as more new vehicles become available and the inventory of used vehicles increases. But we can only wait to see if the predictions of slower inflation rates do indeed come true.

Conclusion

Since there is nothing an investor can do to control the inflation rate, the best course of action is to prepare for it. Our previous blog discussed historic inflation rates and that the best way for investors to stay ahead of inflation is to have an investment plan with a diversified and balanced portfolio. Over the last 50 years, the S&P 500 has returned an average 10.8% per year and a broad corporate bond index has returned 7.3%. This is considerably higher than the annual inflation rate of 3.8% over the same period.

While we cannot see into the future, there is one way to see how inflation can impact one’s lifestyle in the future. At Prato Capital, we offer a Financial Life Plan (FLP) that allows us to adjust inflation rates so our clients can quickly see the impact various rates can have, and we offer solutions that will best serve our clients throughout every stage of their lives. Small changes to an investment and savings plan over time can provide dramatic results.

At Prato Capital, this is what we offer to our clients. If you are a long-term investor who is concerned about inflation and your financial future, give us a call. We can help.