Here’s where the inflation came from in 2021

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After being in hibernation for decades, inflation woke up to a terrifying one in 2021. The Consumer Price Index rose 7% in 2021, the fastest pace in 39 years.

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The inflation story is set to get even bigger in 2022, as the Federal Reserve tightens monetary policy, the stock market SPX,

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Trembling and a critical midterm election approach.

At the start of the year, the rise in prices mostly reflected unknown supply-chain problems stemming from the COVID-19 pandemic, but as 2021 progressed, inflation spread to almost every corner of the economy.

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Nevertheless, the prices of goods such as food, vehicles and furniture are rising the fastest. Inflation in services remained moderate except for the most important: shelter.

today’s fresh news: Consumer prices rose 0.5% in December and inflation hit a nearly 40-year high of 7%

Everything can be more expensive, but some prices are rising faster than others, and some prices matter more to us than others, as they are a bigger part of our budget. (It goes without saying that every family is different; these numbers are averages for urban American households.)

In this analysis, I am examining where inflation came from and where it didn’t.

The rise in car and truck prices accounted for nearly a third of the 0.5% gain in the CPI in December. Haircuts, equipment, clothing and airfares also had a major impact on inflation rates.

market inspection

Four items in the family budget

The bulk of the profit last year was in four big items In the typical family budget: energy, motor vehicles, shelter and food. Those four items represent about 61% of consumer purchases, but account for 79% of the inflation we’ve experienced over the past 12 months.

Energy prices were the largest contributor to inflation for the year. Although energy takes up less than 8% of the typical household budget, it accounts for about 26% of inflation. The good news: Global energy supply and demand are getting back into balance. Energy prices actually fell 1.1% in December.

Motor vehicles accounted for around 21% of inflation in 2021 and 32% in December, even though they also represent only about 8% of consumer purchases. Auto makers are still struggling to find parts, and sales of new cars declined in December as inventories near record lows. The supply crunch pushed up the price of new vehicles by 1.3% and the price of older cars by 3.5% in December.

Prices of durable goods, such as trucks and equipment, have soared since the pandemic after falling steadily for decades.

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sea ​​change in durable goods

But it’s not just new and used vehicles that have become more expensive. The sea change has been in the price of durable goods, which are defined as physical goods that are designed to last three years or more. Think trucks, washing machines, TVs and furniture.

As consumers filled with emergency cash payments from the government denied access to many of their favorite services (such as travel and entertainment), demand for goods increased, especially those that made their homes more inviting, Their commutes are safer and make their lives more fun. , Unfortunately, at the same time, the pandemic disrupted the supply of finished goods and vital parts. You can guess what happened: The prices of durable goods skyrocketed.

Over the past year, durable goods prices have risen 16.8%, the biggest increase since American manufacturers went on a war footing in 1942. To show how extraordinary the price increase is, you should note that the prices of durable goods fell by about 20% between 1996 and 1996. The start of the pandemic in March 2020.

The low inflation of the 2000s and 2010s was built on a foundation of steady deflation in durable goods prices, mainly due to globalization and more productive manufacturing. But that was then. Durable goods, which represent about 12% of consumer spending, accounted for 26% of inflation in 2021 and 40% of December’s CPI.

In December, prices of household goods, including furniture, appliances, blinds, dishes and other items for the home, rose 1.3%, contributing about 10% to December’s profit. For the year, furnishings grew by 7.4%, the fastest growth on record.

Another clear result of the disruption in global trade was a 5.8% increase in apparel prices in 2021, the biggest since 1980. Clothing prices fell by 8% between 1994 and 2020 as production moved to low-cost countries. Prices rose 1.7% in December, accounting for about one-tenth of December’s CPI.

All told, the prices of commodities (including both durable and non-durables such as food, gasoline and clothing) rose 12.3% over the previous year. They contributed about two-thirds of inflation but just 39% of spending.

Services, which represent about 61% of consumer purchases, are far less than 4%, contributing to more than one-third of inflation in 2021. This is more than double the Federal Reserve’s inflation target of 2%.

shelter and food

Shelter is by far the largest share of services spending, accounting for about one-third of the total consumer budget. Homeownership costs and rents (together the government calls them “shelter rents”) have begun to rise, delaying the response to historic gains in home prices since the pandemic began.

In 2021, the price of shelter rents rose by 4.2%, contributing to about one-fifth of the inflation we saw. Over the past three months, however, shelter prices have risen at a 5.4% annual rate, a Big concern for the Federal Reserve, Shelter prices are very sticky and carry a large weight in the CPI.

In contrast, food prices are very flexible. Because consumers buy food all the time, they see when prices are rising. Grocery prices rose 6.5% in 2021 and have grown at a pace of 10.8% over the past three months.

Prices of food purchased for consumption away from home have risen 6% over the past 12 months, with restaurant and fast-food prices rising at the fastest pace on record. Everyone knows that the price of food is much higher than before.

Food represents about 14% of consumer purchases, split almost equally between food purchased for home consumption and food consumed away from home. Food was about 13% of inflation in 2021.

where there is no inflation

Inflation news is not universally bad. Many things about which people used to worry a lot in the past have become popular recently.

For example, health care was a major engagement in the decade before Obamacare was implemented in 2010. But in the past year, despite a terrifying health emergency, the prices of medical care have risen just 2.1%. Prescription-drug prices are flat and health-insurance prices are down 1.2% due to increased government subsidies. However, the prices of medical care are rising from lower levels. In the last three months, they have grown at 4.1%.

College tuition, which grew at a 6.7% annual rate in the 2000s and 3.4% in 2010, grew just 1.8% in 2021.

Rex Neuting is a columnist for Marketwatch and has been writing about the economy for over 25 years.


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