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Here’s Why Inflation Is Up: Oil and Cars, Period

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Another hot month for inflation, huh? The Consumer price index (CPI) in July rose 5.4% over the previous year, as did the June reading. Meanwhile, last month the index rose 0.5%, an improvement from the 0.9% jump in June, but still high. Basic consumer prices, which do not include food and energy, rose 0.3% last month, slightly below economists’ expectations for growth of 0.4%.

But Brad McMillan, director of informatics at the Commonwealth Financial Network ,’s higher inflation numbers lately don’t deprive him of any current trend. These are a few one-offs.

“The inflation story is more about isolated components rather than general price growth, and even those components are showing signs of peak,” he wrote in a report after the release of June’s CPI numbers on Wednesday. “Headline numbers do not indicate sustainable inflation.”

His opinion roughly agrees with that of Federal Reserve Chairman Jerome Powell, who argues that the results of higher inflation are temporary phenomena stemming from supply bottlenecks caused by the pandemic and accumulated public demand that is tired.

McMillan’s main example of a transient factor is energy. Inflation in energy is very, very high, growing by 23.8% in the last 12 months. As such, it is the largest component in the rise of the CPI in recent times. “This agrees with the increase in oil prices,” he noted. “The story of headline inflation is about the oil market, not general price inflation.”

The outlook for energy prices is that it will start to slip, he continued. “Oil prices are falling, but also rising,” McMillan added. And how. Last month, the Organization of the Petroleum Exporting Countries (OPEC) and its Russian-led allies agreed to cut production, which should lead to a reduction in oil prices. Since then, oil has fallen nearly 7%, to $ 69.34 a barrel. Recall that during the initial outbreak of the virus, oil sank below zero.

An additional thing that increases the base numbers, though for now, McMillan pointed out, is the price of the car. “The vehicles are big,” he said. The price of used cars has jumped 41.7% in the last 12 months, and new cars 6.4%.

But this large increase, due to accumulated demand and a lack of vital items like chips, seems to be cooling off. After a three-month sharp increase (an increase of 10.5% in June), used cars recorded an increase of just 0.2% last month. “Here, too, you can give a good argument that inflation refers to several factors, and not on a broader basis,” he wrote.

In other areas, price growth has slowed, he said. Service inflation, for example, is on the rise, but not very alarming. The shelter, probably spurred by the rush to buy houses, rose only 2.8% from a year earlier. Prices for medical services advanced only 0.8% at the time. And transport services, up 6.4% from the previous year, actually eased the situation a lot last month, falling 1.1%.

Moreover, comparing this year’s prices with artificially depressed prices in 2020 is wrong, McMillan claimed. As he said, “most price increases this year are just tackling the lack of price increases in 2020.” And after reviewing the data, he continued, “inflation is above where it was, but it is showing signs of overturning and returning to more comfortable levels.”

Related stories:

Cathie Wood: The big risk is deflation, not inflation

Does the ten-year yield tell us about inflation or the economy? Neither, says Well Fargo

Will high inflation affect the number of stocks? You bet, Goldman says

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