Used cars and trucks drove much of May's steep inflation number

·2 min read
Use cars
Use cars Jim Watson/AFP via Getty Image

The Labor Department reported Thursday that consumer prices jumped 5 percent in May versus a year earlier. That's the biggest rise in inflation since 2008, and it was steeper than expected, but "right now, it's a yellow traffic light situation," The Washington Post reports. "People are on alert, but there's no panic or slamming of brakes."

There are two main reasons economists and nonpartisan policymakers aren't panicking: First, prices were really low last May due to the COVID-19 pandemic, making a return to normal prices look dramatic, and second, the price increases for many products were due to temporary shortages in supply or materials. Those factors loomed large in the six categories of goods and services that accounted for half the jump in the consume price index (CPI), Bloomberg economists calculate: Used cars, rental cars, car insurance, airfares, hotels, and restaurants.

And of those six categories, used cars and trucks account for about a third of the total monthly CPI increase, the Labor Department says. A dearth of new cars, due largely to production delays caused by a pandemic-related global semiconductor shortage, "has tightened the supply of used cars as owners hold on to their vehicles longer — which, in turn, sent the prices of used cars and trucks soaring 29.7 percent in May, versus a year ago," The Wall Street Journal explains. And because rental car companies can't restock fleets of cars they sold off last year amid slumping demand, prices for car rentals soared 110 percent in May.

"As the economy adjusts to a post-pandemic world," the Post says, "suppliers will adjust. Shortages will dissipate. Factories will eventually produce more furniture, washers, cars, and computer chips," and the price increases will likely be short-lived. However, "price increases on services, including rent, often stick around for years to come, especially if companies bump up wages by several dollars," the Post explains. "Businesses often turn around and pass those extra costs on to consumers. Then employees ask for more pay again and the price hike cycle begins."