Strong demand for transportation and energy, which increased by 1.3% and 0.9% in August, were the primary catalysts for the 0.4% increase in the Consumer Price Index. The all-important core CPI excluding food and energy rose by a similar amount.
The major takeaway from the August data is that pricing remains muted.
On a year-ago basis, prices climbed a muted 1.3% and are up 1.7% in the core metric, according to data released by the Labor Department on Friday. The major takeaway from the data is that pricing remains muted.
The increase in both energy and transportation components are not commensurate with the evolution of aggregate demand in an economy that will be absorbing weaker aggregate demand because of the loss of $60 billion per month in income supplements in the September and October readings.
Growing concerns around food pricing and food insecurity have been in focus of late. Food prices increased 0.1% on the month and are up 4% on a year-ago basis. While it is too early to call a cyclical peak in food prices because of the uncertainty around the direction of the pandemic this fall and winter, it would appear that food prices, which increased modestly following the 0.4% decline in July, have settled down to the point where social risks around the increase in food prices have at the least momentarily ebbed.
One other pricing trend we will be monitoring in the coming year is the evolution of housing costs, which comprise 42.2% of the total weight in the index, the owners’ equivalent rent of residences that accounts for 24.2% of the index and owners’ equivalent rent, which makes up 22.9% of the CPI.
Owners’ equivalent rent pricing data pointed to an increase of 0.1% and housing 0.2%. The interplay between rising housing costs because of supply constraints and the decline in rents in many of the major urban metros will provide a major influence in inflation in 2021.
The August CPI shows that threats of inflation are well in hand …
Not surprisingly, our preferred metrics of rents, CPI rent of shelter, eased to 2.3% on a year-ago basis, while CPI services excluding rent and energy eased to 1.7% over the past 12 months.
Given the damage to the service sector wrought by the pandemic, this metric likely illustrates the pricing outlook for service-based firms and points to mild deflation in the portion of the economy that is responsible for 70% of gross domestic product.
Inflation acts with long and variable lags, and these data are why we continue to maintain that the major risk to the outlook is not inflation but rather deflation.
Away from these metrics, medical care, food and beverages and the cost of services all inched forward by 0.1% on the month. Apparel costs increased 0.6%, education 0.1% and the cost of commodities 0.8%, all month over month.
Inflation expectations move lower
Expectations of inflation continue to drift lower, according to estimates by the Federal Reserve Bank of Philadelphia. Expectations for inflation over the next 12 months dipped to 1.9%, which is not altogether inconsistent with the latest headline inflation rate of 1.3% in August and the core inflation rate of 1.7%.
The most interesting aspect might be the decline in 10-year expectations to 2.1% at a time when the Fed is considering a change in policy, allowing for a target range of 1% to 3% inflation rather than its traditional 2% point target. To achieve the Fed’s mandate of full employment and to avoid deflationary conditions, the Fed seems ready to allow inflation to rise above its 2% target. But with the Fed having already exhausted its tools — dropping the federal funds rate to the zero lower bound and with interest rates out along the curve at extremely low levels — the Fed might find itself pushing on a string, waiting for a strong-enough fiscal response that would pressure both consumer demand and push consumer prices higher.
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