At the start of the year, prices for new and used cars were skyrocketing. No one had ever heard of a 40% inflation rate for used cars, but an acute shortage of semiconductors has thrown the auto market into disarray. With chip shortages drastically reducing new car production, consumers with plenty of cash used instead. Prices therefore skyrocketed.
With the chip shortage easing, car prices are falling back to earth. The year-over-year change in new cars peaked at 13.2% in April and has now fallen to 8.4%, as seen in the first chart below. Used car inflation fell from 41.2% in February to just 2%. Rental car inflation, at 39.1% a year ago, is actually negative, with prices down 3.5% over the past 12 months.
All of this is welcome evidence that some of the forces behind high inflation this year are easing. Headline inflation peaked at 9% in June – a new 40-year high – and has gradually fallen to 7.7%. Finally, the markets are seeing tangible progress in the war against inflation. Stocks rose after the October report showed a half-point drop in the inflation rate, on hopes the Federal Reserve might be able to slow its aggressive pace of raising interest rates. interest.
Other categories of inflation reveal where trouble spots still exist. Energy was another big driver of inflation, for two reasons. Energy markets were tight, with prices rising, before Russia invaded Ukraine. After the invasion of Russia, markets tightened further and prices rose further. Nine months after the start of the war, energy producers and consumers have adapted and markets have stabilized. But there is an energy war between Russia and the West that resembles the military war in Ukraine, and it is not nearly over. Further disruption could come in December when a European ban on Russian oil purchases takes effect, along with a US-led plan to impose price caps on Russian oil sales.
For now, lower global oil prices have lowered gasoline inflation, as shown in the second chart. Gasoline price inflation jumped from 60% in June, when pump prices hit $5 a gallon for the first time, to 17.5% in October. Household energy costs improved slightly, from an inflation rate of 21.9% in June to 17.1% in October. While the trend is going in the right direction, no one can be happy about a major commodity that is posting a double-digit rise. High energy costs are one thing that could prevent the Fed from bringing inflation back to its preferred target range of around 2%.
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The third chart, showing inflation for rents, groceries and transportation, looks more stable, with no wild swings in prices. But this graph generally reflects bad news, as the essential goods on which families spend a large part of their budget have increased more than wages. The annual inflation rate is 7.5% for rent, 12.4% for food and 11.2% for transportation. Salaries only increase by 4.7% per year. With the higher cost of basic necessities and staying there, many families are falling behind.
During this time, there is very little deflation: almost nothing goes down in price. Falling inflation rates always represent price increases that are on top of previous price increases. Gasoline prices, for example, are now hovering around $3.90, down from around $3.50 the year before. The November 2021 price was up from $2.20 a year earlier. The inflation rate from 2021 to 2022 is lower than the inflation rate from 2020 to 2021. But the net cost to consumers is still considerably higher. This could change in the coming months as the slowing economy, weakening demand and steadily improving supply chains drive year-over-year price declines. This will be a stronger sign that inflation is falling.
The fourth chart shows travel costs, which are worth looking at because they generally reflect the money people choose to spend, but don’t necessarily have to. Year-over-year airfare inflation is stratospheric, at 42.9%, as fuel costs drive up costs and consumers – eager to get around after COVID shutdowns – don’t hesitate to pay. This is undoubtedly good news, as it shows that some consumers have a lot of money to spend on non-essentials.
Hotel and car rental costs are returning to normal, after post-COVID inflation spikes. Again, rental car inflation has disappeared. Hotel room inflation fell from 25.1% in March to 5.9% in October. This is a sign that supply issues, labor shortages and other issues affecting the travel industry are improving. Everyone wants it to happen faster, but at least it’s happening.
Rick Newman is a senior columnist for Yahoo finance. Follow him on Twitter at @rickjnewman
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