WHOOSH the purchasing power of the dollar goes to hell as service inflation takes off, food spikes, energy booms, but used cars finally come to a halt
The Fed continues to add fuel to the fire.
By Wolf Richter for WOLF STREET.
Today’s consumer price index – a measure of how quickly the dollar and everything dollar-denominated, including labour, has lost purchasing power – is a spectacle of horror, such as most Americans have never seen in their lives. The reality on the ground is even worse for many people because the CPI is slow to pick up on searing housing inflation as we’ll see in a moment, and because the CPI is structurally skewed to represent the inflation felt by high-income households, while low-income households, as Fed Governor Lael Brainard pointed out last week, face higher inflation and feel it much more.
The headline consumer price index (CPI-U) rose 1.2% in March from February and 8.5% from a year ago, the worst since 1981, the data shows. released today by the Bureau of Labor Statistics.
But by 1981, the Fed was effectively suppressing inflation with double-digit policy interest rates, and inflation was falling.
Now inflation is skyrocketing and the Fed continues to clamp down on short-term interest rates near 0%, and it still holds $8.9 trillion in assets on its balance sheet following years of money printing, including $4.8 trillion it has printed on the past two years to suppress long-term interest rates and produce the greatest wealth disparity on record. And now we are surprised by this spike in inflation?
There is no period in history that compares to this period, not even the 1970s because the Fed was not printing money in the 1970s.
WHOOSH becomes the purchasing power of the dollar.
Consumer price inflation is not a sign of anything positive, but a sign of the loss of the purchasing power of the consumer’s dollar, including the purchasing power of labour. And it’s cumulative, month after month, year after year. In March, the purchasing power of $100 in January 2000 fell to a new high of $58.80, which is why Americans’ mood froze:
Inflation in services is now in full swing.
The services CPI – which includes housing costs – jumped 0.7% in March from February, the third consecutive jump of this magnitude, and 5.1% from March last year , the worst services inflation since 1991. Given the sluggishness of the CPI is picking up on soaring housing costs, this part of the CPI will continue to worsen, even if gasoline prices and used cars could go down.
Housing cost inflation.
The largest component of the CPI is ‘housing’, a basket of services designed to represent housing costs and which accounts for 32.7% of the total CPI. The most important components of this basket are the “rent of the principal residence”, which represents 7.3% of the total CPI, and the “rent of equivalent residence of the owner”, which represents 24.0% of the Total CPI.
“Rent of the main residence” jumped 4.4% in March (red in chart below). This tracks what tenants have reported as their actual rent payments, including in rent-controlled apartments.
“Equivalent rent owner of residences” increased by 4.5% (green line). This tracks the costs of homeownership as a service, based on what homeowners said their home would be rented for.
Since both of these measures of rents are lagging, they will continue to soar as they catch up, even if over the next 12 months housing inflation should actually calm down a bit. So, those components of housing that are much heavier than used cars or gasoline are guaranteed to exert upward pressure on the CPI through 2023 (my discussion of this phenomenon).
Note that both measures are still well below the overall CPI and therefore are still now CPI, but less than before, and as they rise, they will maintain the CPI even less.
In terms of “asking for rents” In the United States, which is a measure of what landlords are asking for their apartments and houses that they have rented out, the inflation picture is hot. The Zillow Rent Index jumped 16.8% year-over-year, despite March’s slight decline. Compare it to the “main residence rent” (purple) and the “equivalent owner rent” (green), which have a lot of catching up to do, and they will partially catch up, but with a delay:
The real costs of buying a house rose 19.2% year-over-year, according to the Case-Shiller home price index, with a totally wild raging mania in some markets described in America’s Most Splendid Housing Bubbles.
The CPI hasn’t captured this raging housing cost mania though, as you can see in this chart of the National Case-Shiller Index (purple) and the CPI for “homeowner’s equivalent or rent “, the property cost surrogate (red). Both indexes are pegged at 100 for January 2000. The chart shows the disconnect between housing costs in the CPI and the reality homebuyers face:
Inflation of durable goods relative to non-durable goods.
Durable Goods CPI – includes new and used vehicles, consumer electronics, furniture, appliances, etc. On a month-to-month basis, it pulled back for the first time in months (red in the chart below).
The decline was due to CPI used vehicles, which fell for the second consecutive month (-3.8% in March compared to February), which reduced the year-over-year peak to a still insane 35.3%. The fact that used vehicles have reached price resistance, due to slowing volume and abundant supply, became clear months ago (my discussion of that ultimately ridiculous all-time high and its decline).
CPI of new vehicles rose just a little in March compared to February, and year-on-year rose 12.5%, the second worst on record, behind the peak of 12.7% in 1975.
The CPI for non-durable goods – which is dominated by food, energy and household supplies – grew by 13.1%, the worst since 1980 (purple line):
Inflation of “food at home” rose 1.0% for the month and 8.5% year-over-year. Main categories and their year-over-year peaks of CPI inflation rates:
- Cereals and cereal products: 10.1%
- Beef and veal: 16.0%
- Pork: 15.3% as people switched from beef to pork.
- Poultry: 13.2% as people switched to poultry rather than pork.
- Fish and seafood: 10.9%
- Eggs: 11.2%
- Fresh fruit: 10.1%
- Fresh vegetables: 5.9%
- Dairy and related products: 7.0%
- Coffee: 11.2%
- Fats and oils: 14.9%
- Baby food: 10.8%
Inflation of “out-of-home food” jumped 6.9% year-over-year, the most since 1982. That includes everything from high-end restaurants to elementary school food.
Energy costs exploded 11.0% for the month and 32.0% year-over-year. They weigh 7.6% of the overall CPI. Among them:
- Gasoline: +18.3% for the month and +48.0% year-over-year.
- Utility natural gas at home: +0.6% over the month and +21.6% over one year.
- Electricity service: +2.2% over the month, +11.1% over one year.
Core CPI: Inflation if you don’t buy food and energy.
The “core” CPI-U excludes volatile commodity-dependent food and energy components in order to measure inflation across the economy. Thanks to the month-over-month decline in the CPI for durable goods and the slow recovery of housing inflation, the core CPI rose “only” by 0.3 % for the month and 6.5% year over year, the worst spike since 1982.
Dear Crypto Fans, We Love You, But…
Have fun with cryptos and play with cryptos, earn a lot of money, lose a lot of money. But don’t pretend they’re a hedge against inflation or against the dollar’s collapse or anything, because Bitcoin plunged 33% against the dollar year over year, and 41% against the dollar from the November peak. More, more, bitcoin lost another 8.5% of purchasing power due to inflation. So do the math, in terms of coverage against anything.
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