Has Inflation Peaked?

The Consumer Price Index (CPI) went up again in May. Over the last year, prices across the economy increased an average of 8.6 percent, up from 8.5 percent in April’s year-over-year reading. And yet, inflation might be starting to go down.

The reason for the paradox is that CPI, which tracks price changes in a hypothetical basket of goods, can’t tell the difference between price increases due to monetary inflation and price increases due to other causes, such as supply shocks, regulations, or changes in supply and demand. Inflation is what happens when the money supply grows faster than real economic output. The rule of thumb is that if it isn’t monetary, it isn’t inflation.

May’s CPI increase was driven by large increases in energy (34.6 percent), food (10.1 percent), and vehicles (12.6 percent for new ones, 16.1 percent for used cars and trucks). Much of those price increases have little to do with inflation.

Energy prices, for example, spiked due to Russian President Vladimir Putin’s invasion of Ukraine. They are staying high because bad policies are making it difficult to adapt, such as the 1920 Jones Act shipping law and restrictions on drilling and fracking. Supply chain difficulties, many made worse by trade barriers and labor regulations, are affecting both food and auto prices. Vehicles are being hit with a triple whammy, with steel tariffs and semiconductor shortages further raising prices. Even used cars are being affected. People priced out of new cars are crowding into the used market instead, driving up demand, and thus prices, th