Will inflation stick around?


Head US economist for Societe Generale Stephen Gallagher says a rise in transportation related prices is mostly responsible for the recent surge in the Consumer Price Index (CPI). While U.S. CPI increased 4.9% year-over-year through May 2021, when you strip out transportation, CPI ex-transportation is at 1.7% year-over-year.

So, for those worried about inflation, once we remove the outliers, such as transportation, Gallagher sees more subdued price trends.  And this has been reflected in the relatively moderate inflation expectations by both the market and consumers.

“However, we cannot just drop out components with rising prices and say everything else is fine,” says Gallagher. “Inflation is about the general price levels over time. Removing any particular component is valid only when price movements are viewed as temporary, and we want to examine the underlying trend.”

For transportation, Gallagher sees the recent price surge as temporary. Together, gasoline and used vehicle prices are adding 3.0pp to the 4.9% year-over-year inflation rate. Gasoline prices are volatile and frequently contribute to wide CPI variation, and we have seen a big bounce in gas prices since spring of 2020, when gas prices were particularly soft. Meanwhile, used vehicles are seeing shortages due to car-fleet sales, low inventories, and production setbacks due to bottleneck constraints, combining to create a shortage in the face of surging demand. 

While transportation-related inflation is significant, it is primarily due to temporary price movements that should settle down in time. 

Stephen Gallagher Chief U.S. Economist Societe Generale Corporate Investment Banking