As the US economy reopens, inflation is making a comeback, lifting consumer prices up by 5% during May. This is the fastest year-over-year pace since 2008. Surging demand experienced by many businesses is choking off supply chains trying to keep up with demand.
Higher Consumer Prices Are Eroding Consumer Purchasing Power
Rising prices in the red-hot yet fragile US economy continue to drive prices higher. This in turn continues to erode consumer purchasing power.
This is according to the latest Consumer Price Index report. The Bureau of Labor Statistics released an update last Thursday.
During the early days of the pandemic last year, manufacturers cut production down as demand fell off a cliff. Now, these same producers are scrambling to fill orders from pent-up demand.
With the new demand comes new purchasing contracts, which necessitated bulk orders of raw materials. With higher material prices and bigger labor costs, prices of limited commodities went up.
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Consumer Prices Are Up
For example, airline fares are up by over 24 percent due to increased demand. Retail clothing suffered heavy losses as many people didn’t want new clothes while they stayed at home.
Now, they’re raising prices by 5.6%. Meanwhile, the food price index was up by 2.2 percent compared to last year. When grocery item prices spiked during the pandemic due to limited stocks, they have yet to go down to pre-pandemic levels.
Basic food item prices are going up. Bacon is 17 cents higher in May ($5.40 for a 16 oz pack) than in April ($5.23) In contrast, the January price for the same item is $4.72.
Prices are even higher in metropolitan areas. New York places the cost of bacon currently at $6.49, 39 cents higher than the $6.10 rate in April. In San Francisco, bacon rose from $5.71 in January 2020 to $6.55 in April to $.682 in May.
Paying More For The Same Items
Phil Tedesco, vice president of retail intelligence analytics at NielsenIQ, says the difference is apparent. “Across a wide basket of the most popular 5,000 items, shoppers are paying +0.4 pts more for groceries in May of 2021 vs May of 2020,” he said.
The disappearance of promotions and discounts also made consumer prices higher for many items. “This indicates shoppers are not able to take advantage of as many discounts in-store as they did in a pre-Covid period,” Tedesco said.
Looming Price Increases
Many economists expect price increases to continue over the summer as demand continues to grow. Despite the rise in demand, supplies of goods, as well as an apparent labor shortage, can dampen sales.
Diane Swonk, the chief economist at Grant Thornton, remains tentative. “I think we’re still going to have a warm summer when you have surge pricing kicking in for everything from airfares to hotels,” Diane Swonk, chief economist at Grant Thornton, told CNBC.
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Watch CNBC’s Jim Cramer reacting to consumer prices jumping 5% in May:
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