Much of the recent discussion around risks to the domestic economic outlook revolves around inflation or the ghost of something that has not materially haunted the American economy during the past four decades.
While year-ago base effects will cause top-line estimates of pricing to rise in the coming months, we expect a midyear peak in the CPI of 3.1% before easing back toward 2.3% by the end of the year.
In February, the top-line CPI increased by 0.4% month over month and by 1.7% year over year, according to data released by the U.S. Labor Department on Wednesday. Core CPI, excluding food and energy, inched forward by 0.1% on the month and by 1.3% on a year-ago basis.
Energy prices increased by 3.9% on the month and were up 2.4% on a year-ago basis, while gasoline prices advanced by 6.4% on the month and by 1.5% compared to a year ago. Both of those prices are indicative of the collapse in demand last year as the pandemic crippled the economy, and reflect the recent reflation of that same demand as the economy readies to reopen.
The cost of housing, which constitutes 42.3% of the index, was up 0.2% on the month and 1.8% over the past year, while food advanced 0.2% on the month and 3.6% compared to last year.
The cost of transportation advanced by 1.1% on the month and by 0.6% from a year ago. As the economy reopens, the cost of transportation, which accounts for 15.2% of the overall index, will be one of the near-term narratives as airlines continue to limit flights and the cost of jet fuel increases.
The cost of new vehicles was flat on the month but rose 1.2% compared to a year ago, while the price of used cars and trucks declined 0.9% on the month but increased by 9.3% on a year-ago basis.
Medical care, which constitutes nearly 9% of the index, advanced 0.3% on the month and by 2% on the year. Apparel costs declined 0.7% on the month and have fallen 3.6% on a year-ago basis.
Rent of shelter
Our preferred metric of inflation, CPI rent of shelter, eased to 1.5% on a year-ago basis, while services not including rent and energy arrived at 1.24% from a year ago. Service prices constitute 62.47% of the index and this is simply going to be at the center of the public discussion around inflation and risks to the outlook over the near to medium term.
Why do we prefer rent of shelter?
Because it’s where and how we live in our service-based economy. Moreover, it reflects the very low base from which inflation will increase in the coming months.
It is difficult to see a permanent increase in inflation and expectations without wage push inflation that forms off of a large increase in service-sector prices and rents that at this point just do not look in the cards.
There is a long way to go before inflation has a material impact on the economic outlook. This data reflects what we are observing inside the RSM US Middle Market Business Index.
Inside that index for February, a majority of survey respondents noted that higher prices are not being passed along to clients downstream.
In February, 58% of executives surveyed noted that they faced higher prices paid for goods, which was down from 66% in January. Only 17% of the executives reported a decline in prices. But on the question of forward-looking prices paid, 69% said they expect to pay higher prices, 10% lower prices and the remainder expect no change.
How many middle market firms indicate an ability to pass along price increases currently and over the next six months? Given the recent increase in real and nominal yields, the answer might be surprising.
Only 38% of respondents said that they received higher prices for goods or services, 23% said those prices had decreased and 39% noted there was no change. As for the forward look on prices received—the ability to pass along prices paid—59% indicated that they intend to try to pass along price increases, 9% said they expect to cut prices (likely absorbed through thinner margins) and 31% said they expect not to pass along those increases.
Again, this does not scream significant pricing risk to the economic outlook despite the recent backup in long-term rates toward 1.6% and inflation expectations rising to 2% or modestly above that level.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
