Text size
Consumer prices cooled slightly in August, but rising oil prices could undermine any consumer price easing. Here, a car dealership in Linden, New Jersey, last year.
Spencer Platt / Getty Images
Consumer price inflation cooled slightly in August, as the Covid-19 Delta variant reduced economic activity. At first, it reinforces the Federal Reserve’s argument that torrid price increases will not persist. Look a little further, though, and inflation remains a problem.
The total consumer price index rose 0.3% last month from July, down a 0.5% clip from a month earlier and lower than the 0.4% rate that economists surveyed by FactSet had waited. The year-on-year rate slowed down to 5.3% from 5.4%, in line with expectations.
Excluding the impact of food and energy prices, the so-called core CPI rose 0.1% in August from July, its smallest increase since February. This caused the basic year-on-year rate to fall from 4.3% to 4%.
While investors initially encouraged slower-than-expected readings, major indices gave up gains in late-morning trading. Early relief from breathing the dizzying pace of inflation was exhausted as investors acknowledged that the year-on-year rate changed little and stood near the 13-year high. He
S&P 500
fell 0.2% while the
Nasdaq
fell 0.1%.
Behind the August cooling season there were falls in reopening-related areas that have risen in recent months as the economy reopened and vaccinated, money-rich consumers began to venture. The weakness in August focused on used car prices, which depressed commodity inflation, and “reopening” sectors, which depressed service inflation, says Aneries Markowska, an economist at Jefferies.
Airfare prices fell 9.1%, while accommodation prices fell 2.9% from July, the biggest drop since April 2020. Blaming the Delta variant , Markowska expects a rebound in these categories in the next two months, as cases reach their peak and travel is gradually resumed.
As Citi economists said, the August report appears to be a “transient weakness.” They add: “We continue to see signs that inflationary pressure will be more persistent than Fed officials or markets expect.”
Although reopening-related areas cooled in August as the Delta variant spread and pushed for new restrictions and consumer caution, the inelastic areas of the economy still had high levels of inflation. of prices. The price of chicken rose 2.2% last month after rising 0.6% in July, while the price of milk rose 0.9% after rising 0.5% in July. Hospital services were 0.5% higher, compared to 0.2% the previous month, while energy prices rose 1.6% from 1.5% in July .
Continued price increases in areas that most affect consumers’ daily lives help explain a troubling New York Fed report on Monday. Average year-on-year inflation expectations rose 0.3% to 5.2% in August, the tenth consecutive monthly increase and a new high in the series. More worryingly: medium-term inflation expectations over the three-year horizon also rose 0.3% to a new high of 4.0%. Both increases were broad by age groups and income, according to the report.
Rental prices rose 0.3%. Economists say investors should bet on a jump in the income component, which accounts for about a third of the global CPI basket. Markowksa notes that the Zillow and ApartmentList indices have risen 8% and 12% respectively since the start of the pandemic, none of which has been picked up on the housing components of the CPI. Shelter prices are moving slowly and economists consider rising rental prices to be one of the most worrying forms of inflation, given their CPI share and household incomes and why they represent more sticky inflation. .
As central bankers argue that price inflation is transitory, they have stressed the importance of inflation expectations. The idea is that as long as consumers and businesses don’t push spending in anticipation of higher prices, inflation can’t stand it. The New York Fed’s latest reading calls into question the Fed’s assertion that inflation expectations are well-anchored, with consumers looking past short-term outbreaks due to reopening. Three-year price expectations are twice what the central bank’s target rate suggests the logic does not hold.
While part of the reopening boom is starting to fade, there are signs of underlying inflationary pressures that the Fed will no doubt be watching closely, says Seema Shah, chief strategist at Principal Global Investors. Shah says the New York Fed’s inflation expectations report puts policymakers on “high alert.”
The August CPI impression is the last major reading of inflation before the Fed meets Sept. 21-22. While the cooler numbers are good news, the report won’t move the needle. Officials are waiting to see the job report from September to October before making any decision to cut their $ 120 billion monthly in treasury and mortgage securities, meaning the Fed is on track. to announce reduction plans in November and start reductions in December or January.
The conclusion? The August CPI report was a clear victory for the “transitional” camp, but the debate over inflation is not resolved at all, Markowska says. Continued pressure across supply chains and pressure from housing inflation still point to upside risks in the coming months, she said, predicting higher monthly impressions over the next six months. This means that investors can expect an annual base CPI rate well above 4%, double the Fed’s target, for the foreseeable future.
Write to Lisa Beilfuss at [email protected]