US Consumer Price Inflation (CPI) was released on 12th January. The headline figure – which has been widely reported on, and which we agree is sobering – saw a 7% jump in CPI at the end of 2021. However, without context, it’s very difficult to know exactly what this 7% jump means.

Digging deeper into the report, two factors make it clear that the overall jump in CPI, taken in isolation, might not give investors the most accurate picture of price level changes in the US economy.

The first thing to note is that gasoline prices have skyrocketed by an incredible +49.6% year-on-year (YoY). Stripping out the traditionally volatile categories of energy and food results in a headline CPI figure of 5.5%. This is still high, but significantly lower than the headline 7%.

Second, the price of used cars and trucks also rose sharply in 2021, up by +37.3%. Taken together, higher energy and vehicle prices explain half of the most recent inflation print.

Of course, energy and vehicle prices could keep rising, but the adage ‘the cure for high prices is high prices’ is helpful for our thinking here. High prices in the short-term for any product or service typically incentivises more supply, which eventually reduces prices in the medium-term.

Market participants are right to pay attention to inflation, and it would be foolish to suggest we are not witnessing higher inflationary pressures in the US economy. The latest CPI data might justify a slightly more cautious approach, but we are a long way from pressing the panic button. In the meantime, investors can protect themselves with a greater focus on valuation and inflation protection (businesses with pricing power, strong profitability, large market shares, and strong balance sheets).

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