The Consumer Price Index year-over-year percent change hit 5% in May, the highest since August 2008. Though this inflation is significant and should be closely monitored, it should also be less worrisome than other inflationary periods.
The increase is partly driven by only a few industries, and the Federal Reserve sees this rise as just transitory. However, consumers view this inflation as more than just temporary. A New York Fed consumer survey shows that expectations of future inflation are high, which could, in turn, cause more inflation.
The highest inflationary industries are, for the most part, just returning to pre-pandemic levels. The 56.2% increase in gasoline was in part due to increasing demand for gas but much of it was also due to crude oil bottoming out at the beginning of the pandemic. The increase may seem extreme, but crude oil prices are only (for now) returning to their pre-pandemic levels.
Travel is another category that pulled inflation up overall from temporarily high increases. Airline fares were up 24.1%, reflecting a return to domestic air travel after the industry was wrecked from the pandemic. Used cars were also up 29.7% but this is another momentary anomaly stemming from the lack of travel/vacation options over the past year.
In addition, this type of inflationary overheating was likely always going to happen. High transitory inflation is not uncommon during economic recoveries. Between both demand pull and cost push pressures, some high inflation was seemingly inevitable. However, once supply chains limit anymore pandemic related issues and consumers feel fully confident in the recovery, prices and inflation will stabilize.
Nevertheless, consumers don’t share the same opinion as the Fed. This difference is important as it could alter consumer spending and sentiment and even cause higher inflation. Median one-year inflation expectations jumped +.6% to 4.0%, and three-year expectations jumped +.5% to 3.6%. These relatively high estimates reflect a more pessimistic view from consumers when it comes to prices. Respondents over 60 years old and those with a high school degree or less were particularly more bullish in the increase of expected inflation.
It’s worth noting however, median inflation uncertainty also sharply increased. In other words, consumers feel less sure about their future expectations and so the corresponding consumer behavior will be more difficult to predict.
As a marketer, it’s important to keep in mind spending is likely to stay elevated over the next few months and could even be driven higher in the near term by increasing inflation expectations. Many businesses are facing multiple issues including supply chain and labor shortages, which is why focusing on what you can control is crucial. One way to stay competitive is to keep your eye on competition prices to try to gauge efficient price points and understand what a reasonable increase for consumers is.