Inflation has risen the quickest in years, however markets largely ignore it. Here is why

Consumer prices were just seeing their largest one-month rise in nearly 13 years, a fact that could lead some to conclude that a white-hot US economy is on the verge of runaway inflation.

But a June 2021 rise in the consumer price index may indeed not be cause for concern.

Because one of the main reasons for the overall price increase is a dizzying increase in an isolated area of ​​the economy: used car prices.

“The headline CPI numbers are certainly shocking, but when you realize that a third of the increase is in used car prices, The passing picture is clearing, “wrote Jamie Cox, managing partner of Harris Financial Group.” Inflation is rising, but things are well behaved and have not changed much. “

A used car dealer can be seen in Annapolis, Maryland on May 25th, 2021 as many car dealerships across the country are running out of new cars as a shortage of computer chips has caused production at many vehicle manufacturers to nearly grind to a halt.

Jim Watson | AFP | Getty Images

Cox’s comments came just minutes after the Department of Labor released its June 2021 CPI report, which showed the prices paid by consumers were up 5.4% year over year, the largest increase since August 2008. rose 4.5%, the strongest move for the metric since September 1991.

Markets, which had become cautious on rising prices over the past few months and whether it will spur the Federal Reserve to act, appeared calm on Tuesday on inflation.

The S&P 500 was essentially flat shortly after it opened, and 10-year Treasury bond yields actually fell, not the reaction you’d expect from such a hot inflation report.

The rise in inflation in recent months is due to a mismatch between huge backlogs and a limited supply of goods and services that Covid-19 made unavailable for most of 2020. Thousands of Americans hoping to finally travel in 2021 have helped drive up oil and gasoline prices, as well as airfares.

This desire for travel and road trips has also aroused a historic appetite for used cars.

This was the largest monthly increase ever reported for the Used Cars and Trucks Index, which was first published in January 1953.

Ian Lyngen, Head of US Interest Rate Strategy at BMO Capital Markets, confirmed Cox’s assessment of June inflation numbers. He found that used car and truck prices have increased more than 10% month-on-month and about 45% in the past 12 months.

Such numbers, while impressive, are more of a biasing outlier than an expression of broader price hikes across all sectors, noted Lyngen.

The June measurement makes “the last three months 10.0%, 7.3% and now 10.5%,” he wrote. “Overall, a continuation of the pandemic-specific inflation nests – although in the course of further stronger than expected inflationary pressure questions about the” temporary “characterization will certainly arise.”

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