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When Should We Worry About Inflation?

MINNEAPOLIS (WCCO) -- Gas prices in Minnesota just hit $3 a gallon – the highest they've been since 2014.

But it's not just gas that's rising. On Tuesday, the Bureau of Labor Statistics released its monthly consumer product index (CPI) report. It measured the rate of inflation and found prices rose 0.9% in June compared to May. Prices rose 5.4% year over year.

That's compared to the average of closer to 2% over the past 30 years.

The biggest increase came from gasoline (46%), used cars (45%) and airfares (25%). There were also smaller, but significant rises in food (2.4%), furniture (8.6%) and clothes (5%).

"Part of it is catch-up," says Ethan Struby, assistant professor of economics at Carleton College. "Some of it were that prices were so low a year ago."

But what's also playing a big role is supply and demand, according to economists.

"This could be driven by the fact that a lot people are buying a lot of goods and services," said Marcus Bansah, an assistant professor of economics and St. Olaf College.

With vaccination rates up, more people are venturing out. At the same time, stimulus money and more savings for some during the pandemic have left people with what Bansah calls "easy money." He says that's leading to more spending.

On the supply side, Struby says some businesses are showing a "constrained ability" to keep up with the demand.

For example, a shortage of microchips have meant fewer new cars. That's driven more people to the used car market, where prices have risen dramatically. According to Marketwatch, the jump in used-vehicle prices accounted for about one-third of the overall jump in the CPI in June.

In testimony before Congress on Thursday, Federal Reserve Chair Jerome Powell acknowledged the high inflation rates.

"We're experiencing a big uptick in inflation, bigger than many expected, bigger certainly than I expected, and we're trying to understand whether it's something that will pass through fairly quickly or whether, in fact, we need to act," Powell said.

Economists are divided on whether these higher prices will be temporary or more permanent. Powell has said he believes the prices will moderate over the next few months because the largest increases were tied to specific categories affected by the pandemic, like cars and hospitality.

Struby said he's started to be concerned if prices were still rising this much by Thanksgiving. Bansah said a 6% rate of inflation would be concerning.

"In the short-term, yes, it's affecting people's lives," Bansah said. "But one thing is for sure, if the Fed realizes that inflation is going to be a problem, they are going to put on the brakes."

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