The Consumer Price Index (CPI) shows that we’re paying about 5.4% more for items including groceries, cars, appliances, and pretty much everything we buy at retail. Some people call this inflation but others have pointed out that there are some supply chain issues that have pushed prices higher.

Cars, for example, make up about a big piece of the CPI and prices have been high not just because of demand but due to shortages caused by a lack of chips needed to make the vehicles work. There have also been a number of supply chain anomalies caused by the pandemic which has disrupted normal cycles.

Stores don’t know what to order, factories don’t know what to make, and consumers don’t know what they might want next week let alone next month. It’s a recipe that has led to higher prices but it’s also a situation that may sort itself out in a few months. Dan Kline and Maxx Chatsko dug into the numbers, what Fed Chair Jerome Powell had to say about the situation and what might change in the short and longer-term on the August 11 edition of “7investing Now.”

A full transcript follows the video.

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Dan Kline: But that is not what we’re going to talk about today, we are going to talk about the real impact of and I’m putting inflation in quotes, because I’m going to push back and argue that, and the Fed agrees with me, by the way, that what we’re calling inflation isn’t really inflation. It’s not like I called up the Fed and they said, Hey, we agree with you, Dan. There’s just a quote from a CNBC article that backs this up.

But let’s talk about the consumer price index, not the sexiest thing. But the CPI rose by 5.4% in July, that sounds like a huge number. But that’s a year over year number, the fact that it’s a year over year is left out of a lot of the reporting, that’s about the same amount it was up in June. So we haven’t really seen an increase in numbers. We’ve just seen the regular, not the regular and it this is a high number. But we’ve seen a steady number here, the CPI measures changes in how much American consumers pay for everyday goods and services, including groceries, gasoline, clothes, restaurant, restaurant meals, haircuts, concerts, and automobiles. And I say automobiles loudly, because that one’s really important because automobiles are a giant drag here.

So Maxx, I’ll get to you in a second, I apologize for having so much preamble here. These numbers, they sound scary. But let’s take a closer look. The government said CPI increased 0.5% in July on a month over month basis. If you take out energy and food and energy can be very volatile. We’ve seen oil prices and gas prices be up quite a bit, but then go down and sort of be be a little bit all over the place. If you take those numbers out. It went up 0.3%. So kind of throw out that 5.4% that’s the year over year number and that number matters. But we didn’t have a giant spike, we had a 0.3% or 0.5% depending on how you look at it. So Maxx, we’re gonna dig into this in depth. But before we do, what are your top line takeaways?

Maxx Chatsko:  It’s actually I think the 0.3% increase is month over month. So that’s not year over year. That’s a slight right?

Dan Kline: That is a month over month number,

Maxx Chatsko: So it rose 4.5% compared to last year 0.3% compared to June. I think that’s excluding energy. And that is the other thing food. We like food here in America. Yeah, so look, this is definitely higher than the historical averages. If we think about the historical averages, it’s about between 1% and 3%. I don’t know why I’m the only person on screen right now. I actually like looking at Dan, it cheers me up. There we go. Dan, how are you?

Alright, so on the one hand, this is a little bit misleading, right? Think about last year what was going on in May in June of 2020. Most of us were stuck at home, there was travel restrictions, all kinds of things, lots of people working from home. So things are a bit different. So that your year increase? Kind of makes sense, right? I mean, there should be inflation compared to where we were last year. On the other hand, 5.4%, inflation is still pretty high, that’s still considerable right? If you made $50,000 in annual income last year, well, this year, that money is gonna go $2,700 less this year. So it’s $225 a month in less buying power that you have this year. So it does matter. It matters for investors, too. I mean, if you’re going to get 11% returns in the stock market, just pulling that number out of thin air. And then inflation is 5%. Well, your real returns if you adjust for inflation are actually only 6%. So it matters quite a bit.

Dan Kline: Yeah, now let me jump in with that one, Maxx, because that scenario is absolutely true. But it assumes that everything else is the same. So why do I bring that up? Well, we’re going to talk wages in a second. And wages have gone up, especially at the bottom end of the economy. We also have expense differences. Now this is year over year, and last year, we were definitely not spending as much money, many of us were not going to work.

We weren’t traveling like we were but if you look at it this on a two year basis, a lot of people who commute to work aren’t commuting to work as often. I know my wife is in the office today, and she’s going to go back to the office two days a week. A lot of people aren’t going back at all. So yes, absolutely, there are going to be some people who this makes their life more expensive. There are also going to be some people that have this offset by other areas where they are not spending is that is that a fair read on it? Feel free to disagree here?

Maxx Chatsko: Yeah, that makes sense. And and wages are increasing, but so are prices. So it’s kind of this right now we’re kind of in the thick of it’s hard to kind of tell, really, is this gonna be temporary or not? But you think otherwise? I think you think it is gonna be transitory.  You called up Jay Powell this morning. And Jay said, Dan Kline. Love the show. Also. Yes, I agree with you. It’s going to be transitory.

Dan Kline: Yeah, so so I’m gonna, I’m gonna, we’re gonna go completely out of order here. So this conversation is not going to go according to our document. Before we talk about wages. Before we talk about housing, I think we need to look at supply and demand. And I’ve talked about this a lot of times, but nobody knew when the pandemic was going to, I say end, because we’re not clearly not at an end, but change when things were going to open up when people are going to be able to travel. So there’s all sorts of short term shortages, airfares got more expensive, because airlines can only ramp up so fast. Rental cars are next to impossibly expensive for a whole variety of reasons, partially due to a car shortage, but partially also due to increased demand. I’ve talked about this before, but things like inexpensive beach towels were out of stock at the target near my vacation home in the Orlando area, because nobody expected that May was going to be a giant comeback month.

So I don’t think we know what the, let’s call it post pandemic. And I don’t know if the pandemics a thing of the past in one month or three months or eight months. Who knows. We’ll talk about that a little bit later when we talk about booster shots or the potential for booster shots in the next segment. But I would argue that we need to sort out the economy. It’s very much like I’ve talked about the demand at Starbucks (NASDAQ: SBUX), that it used to be really clear, like people left for work somewhere between like 6:30am and 8:30am, there was a line at Starbucks until about nine o’clock, then it got a little bit less than there was a lunch rush. Now Starbucks might be busy at 11:30am. It’s really confusing. And I think our entire supply chain is dealing with that because very few retailers can turn on a dime. Yep, Walmart (NYSE: WMT) can adjust in maybe a month or two, Amazon (NASDAQ: AMZN) can adjust in a month or two. Target (NYSE: TGT) maybe nobody else can.

So the reality is we’re in a situation where inflation doesn’t mean price increases, and we’re seeing price increases. We’re also seeing, you talk about food, it’s more expensive to go out to eat than it is to eat in, you know what a lot of people have been excited to do pre delta variants, go out to eat. So like, I’m not sure I buy that any of this is inflation, with some notable exceptions in housing and an automobile, not in automobiles and housing, and automobiles are up for a reason we can explain.

Maxx Chatsko: Yeah, so I think that’s true. So there’s this supply part of it, as you pointed out, but it’s I think, is broader than that, right? So like, it’s not just that the price of goods is going up and raw materials are going up, it’s that the packaging cost is going up, the shipping costs are going up, that’s a little bit different than like, we just need to tune factory output for 2021 compared to 2020, that’s still a component, I guess I just lean towards it being maybe stickier than, the Fed thinks or stickier than it’s gonna be.

I don’t think it will be transient. And that’s, of course, depending on the timeframes. But I think we’re gonna see some higher inflation for a few years, much higher than the 2% level, the Fed thinks. And, look, I mean, we’re gonna get into this, let’s just get into it. Now. What are some of those big components that are dragging up inflation and CPI Dan? I mean, we talked about cars.

Dan Kline: Cars is the biggest one.

Maxx Chatsko: Yeah, it’s like a third right isn’t like a third of all the inflation or something

Dan Kline: Something like that. And by the way, we welcome your questions and comments. So feel free to weigh in, wherever you are. Give us your thoughts here. Yeah, cars are about a third. And cars are not expensive purely because of demand, or because because, aluminum is more expensive or plastic or whatever. They make cars out of steel, I suppose. You would know you’re in Pittsburgh. This is one of those things where cars are expensive, because there is a chip shortage that is forcing car manufacturers to slow down their ability to make cars. So right now, they’re making the cars that are most likely to sell at the best prices. That has a ripple effect on rental cars because rental cars are very stripped down low margin cars that’s actually pushed the rental car companies into the used car market, the used car market is insane. Let me give an example. And then Maxx, you can jump in.

So I bought my car for a little over $10,000. It’s a 2016 Toyota Prius, I sold my Nissan Versa back to Carvana (NYSE: CVNA) for about $4,700. I could not buy my Nissan Versa back for $10,000 right now, and there is no such thing as a car under $11,000 on Carvana. The prices simply have gone astronomically higher. And that’s based on demand. And that will go away. Now that might take three years to go away, because first we’ll fix the chip shortage, then we will have a spike in demand because there’s a lot of people that are holding their cars together with, scotch tape and gum to get through this. But again, that’s just expanded supply chain issues. And it ripples across the entire economy.

Look, it’s a negative for me that there are no rental cars. My vacation property is off site from Walt Disney World. So it’s hard for me to get people who want to go to Disney. So I just think there’s a big economic ripple for all of this. Maxx, I know you disagree a little bit, so feel free to jump in.

Maxx Chatsko: Yeah, I mean, I agree with that. Right. So for car prices, used cars, rental cars, that should be temporary, right? Because it’s free, because of the chip shortage. A lot of manufacturers, automakers are kind of curtailing or even stopping production facilities, because it doesn’t make sense to continue. Lots are filling up, and they’re just waiting to put chips in it and other components in later. So that makes sense that that’s temporary. Of course, it’s no solace if you are in the market for a car. And I’ve actually thought about this, I just drove out to Philadelphia, right to visit family.

And I was thinking, man, this would be a really bad time to my first accident, on a big road trip like this. Like buying a new car now would really, really suck. So that’s definitely true. Another thing, though, another, like 1/3 of inflation is actually called shelter inflation. So it’s the price of rent and housing. That looks a little more worrisome, a little less temporary to me, Dan, and you have some thoughts on this, at least in your home market in Florida.

Dan Kline: Yeah. So so let’s, let’s talk about this, because I think this is actually the big story. So let’s pretend you, you’re a retail worker, hey, my son’s been working at Wendy’s (NASDAQ: WEN). He’s 17. So he doesn’t have housing issues. But let’s say you’re a retail manager. And because your company, and a lot have, your company raised wages, to $15 an hour, all of a sudden, you had to raise your manager wages. So maybe you were making $50,000, and now you’re making $58,000. But the price of buying a home in your market went up 30%. And the price of renting a home in your market went up, I don’t know somewhere between 10% and 50%. Depending where you are here, it could literally be 50%.

That puts you in a tough situation where all of a sudden, you’re making more, but you can afford less. But for a lot of people that’s factoring into the, where am I going to live equation. So I know and Maxx, you can tell your story after that my wife and I sold our home, because it was worth so much during the peak of all of this. We bought our vacation property, which has since appreciated by like, I don’t know, like, like, like $50,000 I can’t do the math on that, like a third of what we paid for it. And we’re looking at at some point when my son’s out of school, moving from expensive West Palm Beach, South Florida to much less expensive Central Florida, we could afford a much nicer house.

Not everyone could do that. But I do think as you’re seeing housing inflation, that is going to be smoothed out by population shifts. And I do think we saw this huge migration to Florida to warm places Miami prices went insane. West Palm Beach prices went insane. We’ve seen Texas prices go go mad. And I do you think we’re going to see more of that shift like you might see in Pittsburgh an increase in prices. Because compared to New York, Pittsburgh is really, really inexpensive. I think we’ve seen that in Cleveland, I think Boston, which sounds crazy to not talk a Boston is an expensive city. But if you live in San Francisco, Boston’s not so expensive. So I do think it’s a much bigger question than inflation.

And we see some questions and comments. They’re not related to this topic. So if we can answer them, we’ll get to them later in the show. But we’d Of course, like your relevant questions and comments, not that the ones that aren’t aren’t ones we’re happy to take. We just won’t take it in this segment, Maxx.

Maxx Chatsko: Yeah, so I live in Pittsburgh. And so it’s one of the lower costs of living cities, right in the major metro areas, if I can extend the definition of major metro area, Dan. But so housing prices here are insane right now. And they had a low base to be fair. So I don’t know that’s just people moving into the area from outside the area. We do have a big tech presence. A lot of tech companies here. Believe it or not, we are no longer this Steel City, unfortunately, or maybe fortunately, is probably a better thing. I can walk outside without a handkerchief over my face like they used to 100 years ago. So that’s a good thing. But I was casually looking at houses because I read

Dan Kline: But don’t walk inside without one. The CDC right now is recommending

Maxx Chatsko:  So I was casually looking just like hey, my lease renews at the end of the year, like what can I get? And I mean, on Zillow, at least, they have like the historical chart of like that, what did this house cost? And some of it’s an estimate right over time, but like in like mid late 2000 it just spikes really, really high for a lot of houses that I’ve looked at, so I could afford it. But I’m like, Man, I think maybe this will come down or I can afford more if I just wait another year or two. So I think I’m going to do that. But a lot of economists are starting to be worried about this is called shelter inflation. So again, rent and housing. And as you mentioned, it’s a big component of people’s budgets, also about a third of inflation.

So economists that Fannie Mae have said shelter inflation is probably going to more than double from it’s 2% now year over year to maybe four and a half percent or more year over year, and they think it’s going to remain at those levels for a few years. That’s just due to there’s a lack of supply in the housing market, we’re not building enough. A lot of millennials, right? There’s demographic shifts or demographic shifts are, pushing more millennials into their peak home buying years, and then there’s just not enough supply for everybody. So even if other parts of inflation like maybe cars and rental cars come down, shelter inflation, housing market could actually more than pick up the slack. So this could actually be one of the things that keeps inflation pretty high and well above what the Fed expects, for a few years.

Dan Kline: Yeah, and I actually agree with that, because here’s the reality. Moving takes time. And we talk about this from an investing point of view. I think, a lot of smart companies, certainly the big tech companies, the biggest players are looking at, well, where else can we operate? Does it make sense to to open an office in Orlando, because it’s it’s an inexpensive place to live? Should we open in Las Vegas, because it’s an easy place to fly to that’s actually also a pretty inexpensive place to live. But you can’t do that quickly. So it’s one thing to say like, hey, yep, we believe you can work out of these 10 new cities, and that would be great for us. And you can live less expensively. And maybe you’ll take a pay cut, but you’ll still come out ahead. I think that’s the trend. But that’s a trend that’s going to take some time.

Like I mentioned that my wife and I are looking at moving. Well, I have a son who’s in school to the end of the year, I have a lease that runs, it will renew in December. And so then it would be run through December, do I want to own two homes? Do I want to buy something and rent it out? Like, that’s all very tricky, and not everyone can manage that. So I do think we’re actually in a massive population shift that will lead to housing inflation, it’s just going to lead to call it more palatable housing inflation. What do I mean by that? I mean, okay, I’m willing to move to the greater Orlando area where $350,000 buys you a 2200 square foot four bedroom house with a pool, in a resort or a resort like setting. That to me is fabulous, that same house cost $289,000. So a year ago, so is there inflation there? Absolutely.

But it’s going to price out certain people, those people might move to a farther away from Disney World part of Central Florida. So you’re going to see, I think, a pretty big repositioning of the populace. And that is going to be really good for Amazon, which can deliver pretty much anywhere, it is going to be really good for the bigger players. It is going to create some challenges. We’ve seen this with Starbucks every few years, they announced they’re closing four or 500 stores. Well, that’s due to population shift. Wouldn’t shock me if you saw that number double coming up this year, because you’re obviously seeing a lot of business areas where people aren’t going back to work full time. And maybe in New York, where I once checked there were 82 Starbucks within a mile of where I was near Madison Square Garden. Well, maybe you’re only going to need 52 because not every building is going to be as busy. So Maxx, is this something like have you thought about Geez, maybe I should move somewhere to follow this tide?

Maxx Chatsko: Well, I mean, I’m anchored in the Pittsburgh area for family reasons. But I’ve definitely thought about changing what neighborhoods I would want to buy a house in. I work from home so we’re a little bit lucky in that sense. We don’t need to necessarily worry about commute times for the most part here at 7investing. So I’ve at least expanded what neighborhoods I would look at but it’s still depressing. I don’t know.

Dan Kline: Yeah, so I here’s the thing, I don’t want to poopoo the idea of raising and raising prices. I just don’t necessarily want to call it inflation because let’s we talked about cars, that is a big piece of it. We talked about housing, that’s a big piece of it. But appliances, who knew we were all going to put our refrigerator freezers through the paces we’ve put them through in the past year. I bought a refrigerator freezer right before we put our house on the market. So that was an incredible waste of $1,800 but it took like four months to get it. We’ve ordered a couch and a chair for our new home. And that was was was a delay. Did we price shop. No. We literally went found what we wanted. And and looked at different colors and said well which color could we get fast and and pick maybe not our favorite color so we could get it and fast was not fast fast was like was like two months?

So obviously you don’t have to discount when you’re backordered. So again, I do think a lot of this will shake out and I think we need to know, as we figure out call it 18 months from now, how many of us are still working from home most of the time? Well, that’s going to impact say, the laptop market, the the chair market, all the housing market because you want a bigger house, if you’re going to work from home. So I’m just hesitant here, Maxx to use the word inflation. But I do think we are going to pay more for a lot of things. I recognize that that’s,

Maxx Chatsko:  That’s the definition of inflation Dan!

Dan Kline: It is, but the underlying reason for it will correct. And I’ll go back to, it’s the last piece of my document. It’s what Jerome Powell said, he said, the recent acceleration, and he acknowledges the recent acceleration of prices, but believes that the inflation is transitory, and that prices won’t continue to increase at their current pace for too long.

That’s not entirely saying that they’ll go back because prices tend to not fall. But I do think there will be a pretty significant raise in wages. We didn’t talk about this, but there are more jobs available by a million, then there are people looking for work. That was the case before the pandemic, we are back to that. There’s a lot of reasons for that large childcare is a big piece of that. But I just think, and I talked about this a lot with every stock that reports, I almost think you have to throw out the last six months and the next 12 months, it doesn’t really matter if Papa John’s (NASDAQ: PZZA) pizza had a great quarter because people decided to stay home because the Delta variant that doesn’t necessarily tell me that Papa John’s is a good business, it might tell me that Domino’s was so busy that they were a 45 minute wait, or that the better restaurants, were backed up, we absolutely made ordering decisions based on wait. This place we like has a 90 minute delivery time. I just I throw a lot out this year. I’ll give you the last word Maxx.

Maxx Chatsko: It’s interesting, if you have a historical perspective, the Federal Reserve is often wrong in their big policy decisions. And at the worst times, you can look at like the last three or four chairman and chair women, in the last several decades, and they’ve gotten it wrong later. And then we all just kind of ignore it, and everybody else has to deal with the repercussions. Now, it is interesting to me, though, like there’s a growing amount of criticism from economists, like world leading economists, lawmakers, even people who are in the Federal Reserve, right, who think that the Fed’s doing too much right now.

And I think one way I look at it, Dan, if I could see your beautiful face again, all right. The Fed is currently buying $120 billion per month in treasuries and mortgage backed securities. If they weren’t doing that now, there was no stimulus and we had the exact same economy. Everything else is the same right now. Inflation, unemployment, everything was the same as it is now. Do you think they would start buying $120 billion worth of securities right now? Would they start doing that?

Dan Kline: I don’t know. I think the reality is

Maxx Chatsko:  I think it’s an obvious, No. Go ahead. I’m sorry.

Dan Kline: I think the reality is that once they’re doing it, it, they’re going to be very careful to undo doing it. I’ve argued that they’ve put a small percentage of that into Pokemon collectibles, but they have not, they have not agreed. But I think the Fed is going to be very, very, very careful to move in a measured way. Because we’ve seen, like Twitter (NYSE: TWTR), rumors of what the Fed might do, will send the market up or down by 400 or 500 points.

That being said, those tend to be very, very short term moves, we don’t see, Fed meeting notes, cause the market to change course for six months or even a week. Usually, it’s usually at the most, two or three days of the sky is falling. And then like some minor company, that like Wendy’s will come out with good earnings. And people are like, Oh, it’s fine. Like, everything’s good. So I really, I think the Fed gets way more coverage than its actual impact. Not if it was to move radically quickly, but it doesn’t move radically quickly. It moves like a glacier. Bad if you’re the Titanic, generally easy to avoid.

Maxx Chatsko: Yeah, I think there’s a risk of moving too slowly now. They just keep pumping money into the economy when it doesn’t need it. Imagine if something else hits. There’s no other tools the Fed has to respond to the next crisis. If there is one. So then we’re all going to be on the breadline I think. But I think there’s risks of moving too slowly. And yeah, would the market hated if they start, like tapered more quickly, and maybe raising interest rates more quickly than expectation. Sure. But I mean, the consequences of moving too slowly might be worse than that. So I think, I don’t know. It’s just a delicate situation for investors. I agree with you, the Fed’s probably not going to do anything too. too quickly, too hastily. But I think there’s risks to that as well.

Dan Kline: And we did see that even in a very divided country, there was a pretty strong federal government backstop. Obviously stimulus wasn’t perfect. None of the programs worked 100% Well, but there was a pretty good big effort there. So if we get murder hornets that shoot COVID 20 or, or I don’t know, fire breathing lava monsters, I can’t even picture what the horrors are going to be. I’m actually pretty confident that even our divided government will stop us from all being in the breadlines.

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