II’ve been writing for months about the possibility of higher inflation, and now it seems to have finally hit ground. The Consumer Price Index (CPI) for May was 5% year-on-year, the highest in more than a decade.
The real rate is probably even higher.
Energy commodities, and gasoline in particular, have advanced the most compared to any other item measured. Energy was up 54.5% year over year, gasoline 56.2%, as oil prices hit multi-year highs this week on strong travel demand. A barrel of West Texas Intermediate (WTI) hit $ 71 today, a level we haven’t seen since October 2018.
Take a look at what happens when you eliminate volatile energy and food prices. Core inflation, as it’s called, jumped 3.8% from a year ago, which doesn’t sound impressive until you realize it’s the rate. the fastest in almost 30 years. The last time we saw core inflation this high, America’s best films were White men can’t jump and Primary instinct, and General Motors topped the list of Fortune 500 companies.
Hope no one reading this is currently looking for a new car. Thanks to the current shortage of semiconductor chips, the supply of new vehicles has all but evaporated, pushing up the prices of used cars and trucks. Manheim’s used vehicle value index hit a new all-time high in May, suggesting a 48% increase in prices from a year ago. Pickup trucks have increased by 70%.
Expectations are mixed for how long the chip shortage will last. Goldman Sachs Chief Economist for Asia Andrew Tilton told CNBC last week he believed we were in “the worst times” right now, implying that we will see some improvement in the second half of the year. Patrick Gelsinger, CEO of chipmaker Intel, isn’t so sure. He says the shortage could last another two years.
Hope for the best, prepare for the worst
I think policymakers and analysts are equally torn by the potential longevity of this current wave of inflation. The Federal Reserve insists on calling it “transient,” primarily in an attempt to allay investor fears and calm the markets.
Only time will tell if that assessment was accurate, but for now the move seems to be working: the S&P 500 closed at a new high last Thursday, the same day the inflation data was released. Meanwhile, gold, historically used as a hedge against inflation, barely budged, and bitcoin, a digital version of gold, fell 1.8%.
It is possible that the inflation rate for May has already been taken into account. That being said, I would still strongly consider increasing my exposure to gold, including gold mining stocks. Bitcoin should also be taken into consideration.
As I pointed out before, I think the CPI significantly underestimates the impact of inflation on household wealth. The real rate is probably much higher. An alternative measure, that of John Williams Shadow government statistics, shows that inflation could actually be closer to 13% year over year. Invest accordingly.
On the road once more
While new vehicles are scarce, Americans have started to travel as much as they ever have, a key factor in the rise in fuel prices. According to the travel industry information website Skift, the number of Americans who traveled in May exceeded those who traveled in February 2020, before the pandemic. More than 42% of Americans said they had traveled to the United States, up from 40.5% 16 months ago.
And it’s not just car travel we’re talking about here. U.S. airports have become so unexpectedly busy that the Transportation Security Administration (TSA) search for internal volunteers to manage tasks unrelated to filtering such as the management of security lines
This is a huge support for the actions of the travel industry, airlines in particular, as we move deeper into the busy summer travel season.
Although only 2% of Americans traveled outside of the United States in May, up from 7% in February 2020, I expect this to change soon as vaccination rates improve. Last week, France became the latest member of the European Union (EU) to start accepting vaccinated visitors from the United States and elsewhere, and a new ticket which allows people to move more freely between European countries has been finally approved by EU lawmakers.
âTravel companies must be preparedâ for the summer wave, commented Haixia Wang, vice president of research at Skift.
This is precisely what domestic and international airlines continue to do. Air France is preparing to take 22 planes out of warehouses in order to dramatically increase flights to the United States Air Canada would resume a number of international flights this month, from Canada to India, Mexico, the Caribbean and more.
Originally published by American funds, 06/14/21
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The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices of US companies. The Consumer Price Index (CPI) measures the average change in prices over time that consumers pay for a basket of goods and services, commonly known as inflation. The Fortune 500 is an annual list compiled and published by Fortune magazine that ranks 500 of the largest US companies in terms of total revenue for their respective fiscal years. The Manheim Used Vehicle Value Index is a chronological measure of used vehicle wholesale prices.
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