Score a victory for team transitory in the inflation wars. The Consumer Price Index eased in August, reaffirming our view that inflation most likely formed a peak in the summer following the historic supply shock that defined pandemic economics starting last year.
Top-line inflation eased to 5.3% on a year-ago basis, while increasing by a much more manageable 0.3% month over month, according to government data released on Tuesday.
The core rate, which excludes the volatile food and energy items, increased by a muted 0.1% on the month and was up by 4% on a year-over-year basis. Excluding energy costs, inflation increased by 0.1% and rose by 4% from a year ago. Excluding food, energy and shelter, inflation rose by 0.1% on the month and by 4.8% over the past year.
Perhaps more important, services, which comprise 61.4% of the index and are where the majority of economic interaction occurs, were up by 0.1% on the month and by a much more moderate 3% on a year-ago basis.
Our preferred metric—CPI services excluding rent and energy—eased to a 2.9% increase. This is not the stuff of 1970s inflation or the kind of inflation that requires a radical departure from the Federal Reserve’s current direction of monetary policy.
A long road ahead
In our estimation, the data and the evolution of the pandemic both imply that it is far too soon to declare victory over the global supply shock that sent prices surging midyear.
The risks around the delta variant and its impact on global supply chains imply that it’s going to be a bumpy, and perhaps extended, ride for inflation to return to 2% or anything that can be defined as price stability.
Moreover, this data will almost certainly reaffirm well-anchored inflation expectations. As long as mid- to long-range expectations remain well behaved, the Fed will achieve its policy objectives around price stability and create the conditions for a return to maximum sustainable employment.
The Fed’s approach—of keeping the distortions caused by the supply shock in perspective and focusing on returning to maximum sustainable employment—looks prescient.
Given the debate around the reappointment of Fed Chairman Jerome Powell, this data will almost certainly underscore the arguments of those who are advocating his reappointment.
The dog that didn’t bite
The major narrative that emerges from August’s data will be the story of the big dog that barked but didn’t bite: Owners’ equivalent rent, which measures how much homeowners would pay in rent and comprises 23.53% of the series, increased by a manageable 0.3% on the month and by 2.6% from a year ago. Both figures will provide relief across the U.S. policymaking complex.
If there is going to be a significant problem with inflation, it will be in the housing market, and that is just not happening right now.
Stay tuned, because there will be months where housing inflation may not look so good and that is why our core position is that it is too soon to ignore the impact of the supply shocks and what may come because of the pandemic.
Through the end of the first quarter, six items—used cars, rental cars, vehicle insurance, lodging, airfares and food away from home—were the major drivers of the surge in pricing. But in August, the cost of used cars declined by 1.5% on the month while new vehicles climbed by 1.2%.
This data shows that the shortage of advanced computer chips that has limited the production of new vehicles is still being felt. Yet the price volatility that lies ahead will most likely lean toward more supply and lower prices in contrast with the five-month surge observed earlier this year.
Food away from home increased by 0.4%, lodging away from home declined by 2.9%, motor vehicle insurance fell by 2.8% and airline fares dropped by 9.1%.
Elsewhere, the price of energy, which comprises 7.265% of the index, climbed by 2% on the month, apparel was up by 0.4% and transportation costs fell by 0.1%. Recreation costs, as one would expect in the summer season, climbed by 0.5%, while commodity prices were up by 0.6%. Medical care advanced by 0.2%.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
