Things are getting ugly: the purchasing power of the dollar has plunged at the fastest rate since 1982. It is “permanent” and not “temporary”, will not rebound

But it’s much worse than it looks.

By Wolf Richter for WOLF STREET.

The consumer price index jumped 0.6% in May, after jumping 0.8% in April and 0.6% in March – the three month-over-month jumps since 2009 , according to Bureau of Labor Statistics today. For the three months combined, the CPI jumped 2.0%, or an “annualized” pace of 8.1%. This current three-month rate of inflation, as measured by the CPI, has nothing to do with the now infamous “base effect,” which I discussed in early April in anticipation of these crazy times; the base effect only applies to year-to-year comparisons.

On a year-over-year basis, including the base effect, but also including the low readings from last fall that lower the 12-month rate, the CPI rose 5.0% , the largest year-over-year increase since 2008.

As for the politically incorrect way to call consumer price inflation: The purchasing power of the consumer dollar – everything that is denominated in dollars for consumers, including their labor – has gone down 0.8% in May, according to the BLS, and 2.4% from over the past three months, the largest drop in purchasing power in three months since 1982:

On an annualized basis, the three-month drop in purchasing power amounted to a 9.5% drop, eliminating the base effect which only applies to year-to-year comparisons. the other.

This drop in purchasing power is “permanent” and not “temporary”.

Yes, the current fall in purchasing power is permanent. And the fall in purchasing power in the future is also permanent.

The only thing that might make a small part of it “temporary” is if there is a period of consumer price deflation, which has only happened for a few quarters in my entire life, for example in the last few years. month of 2008, which is shown in the table above. So I don’t put any hope.

The rest of the time, we had a lot of purchasing power declines. And that turned out to be a solid “permanent” and we never recovered that lost purchasing power.

Durable goods inflation skyrocketed 10.3% from a year ago.

And it jumped 3.0% in May from April, the biggest month-over-month jump since 1980. The problem is general, but the biggest problem is with used vehicles.

The used vehicle CPI has exploded by almost 30% year on year, and only 7.3% in May. I have long fulminated and dissected the reasons for this price spike, based on data from the auto industry. And it is now showing up seriously in the used vehicle CPI.

This chart shows the actual CPI as a price index, not the year-over-year percentage change in that index. This eliminates the problem of the base effect.

But “hedonic quality adjustments” over the years have kept the used vehicle CPI low, producing this astonishing chart above, where the index in 2020 was below where it was 20 years earlier, even as in the real world, used vehicles have become much more expensive. Only the frightening and crazy price spikes in May and April pushed the index above its level of 20 years ago.

These hedonic quality tweaks are applied to account for improvements made to vehicles over the years, such as the change from a three-speed automatic transmission to an electronically controlled 10-speed transmission. Price increases theoretically associated with “quality improvements” are removed from the CPI.

In theory, the CPI attempts to measure changes in the price of the same item over time; and when the price change is based on improvements, it’s not inflation because you get more when you pay more.

In practice, this has led to a consistent, focused, politically practical and bipartisan underestimation of inflation as measured by the CPI.

CPI of new vehicles suppressed by hedonic quality adjustments. The adjustments have all but eliminated the appearance of inflation as measured by the CPI in new vehicles, even though new vehicles have become much more expensive, with cheaper cars disappearing from the lines of automakers.

Nonetheless, year-over-year new vehicle prices rose 3.3%, the largest increase since 2012, despite vigorous hedonic quality adjustments. Notice how the index increased until the mid-90s, when the hedonic quality adjustments were applied and forced the index back down:

For a dose of reality, auto industry data shows that the “average transaction price” (ATP) of new vehicles sold to retail customers in May jumped to $ 38,255. ATP is based on the price of new vehicles sold and the mix of new vehicles sold. Based on data provided by JD Power, ATP has jumped 28% in the last seven years since 2014. Note the huge jump since June 2020:

The services CPI jumped 3.1% year over year, held up by a spurious cost of ownership index.

About two-thirds of the overall CPI is for services. They include the biggest of all: housing – more on that in a moment. They also include healthcare, insurance, education, subscriptions to services like broadband, cell phone, streaming, etc.

The services CPI rose 3.1% year-on-year and jumped 0.5% in May. Over the past three months, the services CPI rose 1.3%, an annualized increase of 5.2%.

The real fall in purchasing power is even worse.

Housing costs – rent and property costs combined – make up about a third of the overall CPI – this is the most important category of the CPI.

The rent component of the CPI, called “rent of the principal residence” (= 7.7% of the total CPI in May) is increasing month after month this year at a constant rate of 0.2%, including in May, and is up 2.2% over the past 12 months. period of months.

The property component, called “Rent equivalent to owner of residences” (= 23.8% of the overall CPI in May), rose only 0.3% for the month and 2.1% for the period. 12 months, despite the explosion. house prices over the past 12 months.

The reason this component of homeownership completely misses out on searing housing inflation – the dollar’s loss of purchasing power when it comes to homes – is because it is based on surveys. from homeowners on estimates of how much their home rental for. This is a measure of the rent, as guessed by the landlord (red line in the graph below).

The Case-Shiller House Price Index is a more realistic measure of house price inflation. It is based on the sales pair method, measuring price changes over time for the same house, jumped 13.2% year-on-year, the largest increase since December 2005 (purple line):

The loss of purchasing power is “permanent”.

Thus, the hedonic quality adjustments for durable goods, such as new and used vehicles, plus the elegant fiction of “owner’s housing equivalent rent” for housing costs, as well as other reduction methods. CPI, such as ‘substitution’, ensure that the real loss of purchasing power of the consumer dollar – and of labor paid in dollars – is far worse than even that ugly inflation data released today. ‘hui.

And this loss of purchasing power is permanent. It won’t come back suddenly, except fractionally during those minor episodes of deflation that we get from time to time.

What is “temporary” is the pace of the loss of purchasing power, in the sense that it changes every month.

Certainly, soaring used vehicle prices cannot last indefinitely. At some point, we will have to step back. But then other prices will rise, such as plane tickets, hotel reservations, restaurant meals or insurance.

Inflation is a Whack-a-mole game. One appears while another recedes. So it could very well be that CPI inflation will be 4% next May, down from 5% now, and we will celebrate the fact that the 5% was “temporary” and has been replaced by 4%, hahahaha. But the purchasing power of the dollar that is lost every month is lost forever.

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