SACHA PFEIFFER, HOST:
The cost of living keeps going up. The Labor Department said this morning that consumer prices in June were 5.4% higher than they were a year ago. That's the highest rate of annual inflation since 2008. And within the past year, prices jumped almost a full percentage point in just one month from May to June. The spike comes as the economy is roaring back from the pandemic recession, but some of the big contributors to recent price spikes may be easing up. NPR's Scott Horsley joins us now. Hi, Scott.
SCOTT HORSLEY, BYLINE: Good morning.
PFEIFFER: And Scott, I think many people have experienced this sticker shock of all sorts of consumer items. I recently overheard someone saying he paid $98 for a piece of plywood. So what are - why are we seeing this runup in prices?
HORSLEY: Yeah, it's a lot of demand and not enough supply. As we emerge from our pandemic cocoons, consumers are spending freely, and a lot of businesses are having trouble keeping up. That's a recipe for higher prices. We're seeing higher prices for gasoline, for transportation, for food. One thing that really jumps out in today's report is the price of used cars and trucks. That's been a big driver of inflation for several months now. And it's really a byproduct of the lack of new cars on the market.
We've talked a lot about the semiconductor shortage that's been dogging the automakers this year. Economist Jonathan Smoke, who's with Cox Automotive, says carmakers have also had to contend with that deep freeze in Texas during the winter that cut into plastic production, as well as recent flooding in Michigan.
JONATHAN SMOKE: It's just been a series of perfect storm events that have prevented the new vehicle production from getting back to normal. And while that supply has been challenged, we've had surging demand.
HORSLEY: Used car and truck prices jumped 10 1/2% between May and June, and that accounted for more than a third of total inflation last month.
HORSLEY: That's right. Smoke's been keeping an eye on the wholesale market for used cars. That's where a lot of dealers buy the vehicles that then show up on their lots. And those prices topped out about four weeks ago, and they've been coming down since then. Assuming the retail market follows suit, we should see used car and truck prices decline in the second half of this year, which would help to reverse some of the inflationary pressure. Smoke says you can already see less frenzied buying in the wholesale auto auctions, and there are more cars to choose from now on used car lots around the country.
SMOKE: It isn't that demand has completely cratered. It is simply that we've gotten past what has been a crazy spring.
HORSLEY: And that's the kind of correction the Federal Reserve is counting on when it says it expects the jump in inflation will be temporary. The central bank is arguing a lot of these supply bottlenecks will eventually get resolved, demand will cool off a bit, and this era of elevated inflation will slip into the rearview mirror.
PFEIFFER: Many people wonder if the Fed will eventually raise interest rates, which would be good for people with savings accounts but would make loans and mortgages more expensive. So what do you expect the Fed to do related to inflation? What's the broader outlook for inflation?
HORSLEY: Well, for the time being, the Fed is keeping its powder dry and hoping it can ride this out. The Fed's long-term target for inflation is 2%. We're obviously well above that right now, but we've been well below 2% for a long time. We are going to have a stretch of higher inflation now, but both the Fed and the forecasters on Capitol Hill think we're likely to see lower inflation next year, that this is not the beginning of a lasting upward spiral in prices like we saw in the 1970s. If that turns out to be wrong, though, rate hikes would be the tool in the Federal Reserve's toolkit to address higher inflation.
PFEIFFER: That's NPR's Scott Horsley. Scott, thank you.
HORSLEY: You're welcome.
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