This week, Craig Siminski, of CMS Retirement Income Planning, shares an article discussing the causes of the recent inflationary trend; Does it represent a short-term phase, or the start of a longer-term acceleration in prices?
In March 2021, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.6%, the largest one-month increase since August 2012. Over the previous 12 months, the increase was 2.6%, the highest year-over-year inflation rate since August 2018. (By contrast, inflation in 2020 was just 1.4%.)
The annual increase in CPI-U — often called headline inflation — was due in part to the fact that the index dropped in March 2020, the beginning of the U.S. economic shutdown in the face of the COVID-19 pandemic. Thus, the current 12-month comparison is to an unusual low point in prices. The index dropped even further in April 2020, and this “base effect” will continue to skew annual data through June.
The monthly March increase, which followed a substantial 0.4% increase in February, is more indicative of the current situation. Economists expect inflation numbers to rise for some time. The question is whether they represent a temporary anomaly or the beginning of a more worrisome inflationary trend.
In considering the prospects for inflation, it’s important to understand some of the measures that economists use.
CPI-U measures the price of a fixed market basket of goods and services. As such, it is a good measure of prices consumers pay if they buy the same items over time, but it does not reflect changes in consumer behavior and can be unduly influenced by extreme increases in specific categories. Nearly half of the March increase was due to gasoline prices, which rose 9.1% during the month, in part because of production interruptions caused by…
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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 22 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.
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