NEW YORK – The US Consumer Price Index (CPI) excluding food and energy rose at an annual rate of 8.7% in May, on top of an annualized 11.6% rate in April.

The Federal Reserve and most Wall Street pundits claim this is “transitory”, driven by anomalies caused by the pandemic including supply chain bottlenecks and a sudden but not lasting surge in spending as economies reopen.

On the contrary: You ain’t seen nothing yet.

The US hasn’t seen “core” CPI increases of this magnitude since the stagflation of the 1970s. But even this alarming measure underestimates actual inflation. Home prices at last check were rising at a 26% annual rate, almost ten times faster than the government’s measure of home price inflation, the so-called Owner’s Equivalent Rent.

That’s the cost of housing if you were to rent your home to yourself.

Owner Equivalent Rent follows home prices with a lag of 12 to 24 months, as the statisticians at the US Bureau of Labor Statistics smooth out the impact of home prices. The impact of the present housing bubble will feed into higher inflation prints for the next two years.

Another big contributor to the May jump was used car prices. The semiconductor shortage has crippled new car production, forcing rental car companies to buy used vehicles. Used car prices are up 30% year-to-date in the wholesale market. The CPI has captured only half of this.

The inflation spike is anything but “transitory.” Price increases in the pipeline, especially for housing, will keep inflation hot for at least the next two years. 

The Federal Reserve can persist in its impression of the late Groucho Marx (“Who are you going to believe, me, or your own eyes?”) for months – but not years.