Inflation continued to move at or near the top of its pandemic-induced pace in September with the overall Consumer Price Index increasing by 0.4% on the month and by 5.4% on an annual basis as supply chain disruptions fueled increases for the sixth consecutive month.
Sectors that are sensitive to supply chain disruptions—including energy, food, shelter and new vehicles—were the main drivers of the 0.4% monthly increase.
Sectors that are sensitive to these disruptions—including energy, food, shelter and new vehicles—were the main drivers of the increase, contributing 0.07 percentage points to the overall monthly rise, according to government data released Wednesday.
The core rate, which excludes the volatile food and energy components and is followed closely by policymakers, increased at a more restrained 0.2% pace, following the 0.1% increase previously. That rate is up by 4% from a year ago. Excluding food, energy and shelter, inflation increased by 0.1% on the month and was up by 4.6% on the year.
Whatever quantum of solace that policymakers and investors take from the more restrained core rate and an outlook that could be considerably worse given the disruptions to supply chains, we have entered the second leg of those disruptions and inflationary pressures.
Those dynamics are going to be part of the economic narrative heading into next year along with robust growth and falling unemployment, and are not likely to abate until the second half of next year at the earliest.
While we expect the catalysts pushing inflation higher to return to long-term trends, wages are going to rise in the near term for a number of factors. With 2.9% of the workforce quitting in August, firms will continue to face challenges in finding workers, and will be pressured to pay higher wages, all of which will feed into higher prices.
Policymakers, investors and firm managers should expect significant seasonal noise around energy and gasoline prices in the October data. That is when the seasonal adjustments to the Consumer Price Index typically experience a decline. Given the recent runup in energy and gasoline prices, those adjustments will almost surely cause prices to rise.
Federal Reserve policy
The policy takeaway from this data is that the Fed is moving toward changing the language it uses to describe inflation. The Fed will almost certainly use public pressure, known as open-mouth operations, to target inflation expectations as it drops the use of the word transitory from its lexicon.
Expect Fed officials to talk like hawks and walk like doves as they await the supply chain disruptions to ease.
The Fed is almost surely settling in for a two-year siege in which it will be accused of falling behind the inflation curve (it isn’t) and lacking resolve and the tools (it has both) to address one of the more unique rises in inflation in central banking history.
So, expect that Federal Reserve officials, and global central bankers for that matter, will begin to talk like hawks and continue to walk like doves as they await the bottlenecks in the global supply chains to ease. Meantime, the beatings will continue until inflation readings improve.
Inside the data
Within the Consumer Price Index data, the cost of energy rose by 1.3% and gasoline increased by 1.2% on the month. Services increased at a 0.3% pace on the month and rose by 3.2% on a year-ago basis. Food and beverage costs advanced by 0.9% and were up by 4.5% from a year ago. Apparel costs declined by 1.1% and were up by 3.4% over the past year.
The cost of new vehicles increased by 1.3% on the month, while used car and truck prices declined by 0.7% in September. Medical care costs were flat on the month and have increased by 0.4% on a year-ago basis. The price of education increased by 0.6% on the month and was up by 9.1% over the past year.
The cost of shelter, which we think will play a more pronounced role in determining inflation, increased by 0.4% on the month and was up by 3.2% from a year ago. Owners’ equivalent rent of residences was up by 0.4% and by 2.9% from a year ago; rent of primary residences advanced at a 0.5% pace and was up by 2.4% from a year ago.
Estimates of rents remain well behaved, given the widespread reporting of rising rents following the sharp decline in prices early in the pandemic.
One indicator that tends to lean toward a more modest pace of inflation inside the shelter component is that the turnover in the stock of rentals was slightly less than 5% on the month.
While the collapse in rents early in the pandemic in large metropolitan areas has resulted in rather large base effects, or comparisons to the low levels of a year ago, this grossly overstates the pace of rent increases and will over the next year show rents slowing on a year-over-year basis.
In addition, the data used to estimate owners’ equivalent rent will focus on continuing leases as opposed to the small number of units that turn over. For that reason, the increase in rents may be somewhat less than the sensational headlines suggest.