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August 2021 CPI report shows cooling inflation

A recent rise in consumer prices cooled slightly in August, signaling that although inflation is higher than normal, the White House and the Federal Reserve may begin to see the slowing of price increases they hoped.

Policymakers have always argued that a surprisingly strong surge in inflation this year was linked to vagaries of the pandemic and should prove temporary, and most economists agree that prices will rise more slowly as businesses. will adjust and supply chains will return to normal. The big question for the future of the economy has been how far and how quickly the jump will fade.

Data released by the Labor Department on Tuesday suggests that an increase in cases of the Delta-variant coronavirus was weighing on air fares and hotel rates, but it also showed that price increases for key products – like cars – were starting to moderate, helping to subside overall inflation. The consumer price index rose 5.3% in August from a year earlier, the data showed. This was a slightly slower annual pace than the 5.4 percent increase in July.

On a monthly basis, price increases moderated to an increase of 0.3% between July and August, down from 0.5% the month before and a slower slowdown than economists in a Bloomberg survey had expected. .

The news on core inflation, which weed out volatile food and fuel prices to try and get a more accurate reading of underlying price trends, was even more encouraging for policymakers who were hoping to see signs. slowdown in price increases. This index rose 0.1 percent on the month and 4 percent over the past year, compared to 0.3 percent and 4.3 percent in the July report.

“We are witnessing the unwinding of many factors that pushed inflation rates higher at the start of the summer,” said Guy Lebas, chief fixed income strategist at Janney Capital Management. “We will see these continuing imbalances in supply and demand gradually diminish until 2022.”

White House economists greeted the report as confirmation of their opinion that prices should stop climbing so quickly by 2022.

“We see the report as consistent with the story that we, the Federal Reserve and the vast majority of forecasters have been talking about,” said Jared Bernstein, member of the White House Council of Economic Advisers. “It’s a month, and we will continue to monitor the data vigilantly.”

Inflation has been strong this year as the economy reopened after the pandemic, causing airline and hotel room rates to rebound from depressed levels. At the same time, grunts in the supply chain have driven up shipping costs, fueling prices for everything from lumber to toys. Labor costs have risen for some companies, pushing inflation higher, and rents are rising again as workers return to cities after fleeing in 2020.

But policymakers are betting that the annual price gains will settle towards the Fed’s average 2% target over time. Officials set their target using a different index from data released Tuesday, a measure known as the personal consumption expenditure index. This gauge has also increased this year, but less and less, climbing 4.2% during the year through July.

“The rapid reopening of the economy has led to a sharp rise in inflation,” admitted Jerome H. Powell, chairman of the Fed, in a speech last month. But “the baseline outlook is for continued progress towards maximum employment, with inflation returning to levels consistent with our target of 2% average inflation over time. “

Central bankers hope rapid inflation dissipates before consumers learn to expect consistently higher prices, which can become a self-fulfilling prophecy as buyers accept higher prices and workers demand wages higher. A closely watched household inflation outlook tracker released Monday by the New York Federal Reserve showed that expectations climbed to 5.2% in the near term and 4% in the medium term.

This data point is worrisome, but market-based inflation expectations have remained relatively stable after rising earlier this year, and real prices could start falling in important categories in the coming months.

The airfare price index fell in August, according to the Labor Department report, which may be in part due to a wave of the virus affecting travel and advance bookings.

But the used car price index also fell, indicating a return of inventories to more normal levels, helping to restore some consistency in the used vehicle market. Cars have been in short supply this year due to a shortage of computer chips linked to overseas shipments and plant closures, and soaring used vehicle prices have been a major contributor to headline inflation. in the USA.

New car prices continue to rise, and a measure of housing costs tied to local rental conditions – which makes up a large part of the overall price index – has continued to climb at a steady pace.

Mr Lebas said he believes these housing costs will help keep inflation slightly high next year, perhaps in the middle range of 2%.

It is “higher than it has been historically, but not scary,” he said. “If that happens, it is a victory for the Fed.”

The central bank is keeping a close watch on inflation as it examines when and how to cut the big bond purchases it has made to help cushion the economy against the pandemic shock – a move officials have signaled to many occasions could happen this year. The report most likely upheld the expectations of key officials, keeping the policy on its course measured and strongly communicated.

“At the margin, recent data will dampen some of the more exciting inflation expectations in the markets and at the Fed,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a post after the publication.

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