Wednesday, August 11, 2021
The U.S. Bureau of Labor Statistics released its July inflation report showing that the headline Consumer Price Index (CPI) rose 0.5% month-over-month and 5.4% year-over-year. The core CPI, which strips out the volatile food and energy components, rose 0.3% month-over-month, and 4.3% year-over-year. Given strong base effects from rolling off of weak data during the COVID-19 shutdowns, we find the month-over-month data more informative. Within that context, the more volatile components that are heavily tied to the economic reopening, as expected, have started to moderate. Price increases for used vehicles, airfare, and rental cars, for example, have slowed and have actually fallen in some categories.
We continue to see evidence that supply chain bottlenecks and a rapid demand rebound are pushing prices higher. Materials shortages and hiring difficulties will likely keep price pressures elevated in the near term, but we think these supply/demand mismatches will largely resolve themselves in coming months as supply, which has a longer ramp-up time than demand, recovers.
“This inflation release came in as-expected and so it doesn’t really change our view that we think these higher prices we’re seeing currently will subside over time,” explained LPL Financial Fixed Income Strategist Lawrence Gillum. “An economy operating more normally in 2022 should bring more normal inflation.”
As seen in the LPL Chart of the Day, owners’ equivalent rent of residences, a measure we’re watching closely to determine the “stickiness” of higher prices, increased 0.3% in July and rose 2.4% year-over-year, which was slightly higher than last month but still lower than in past years. Owners’ equivalent rent of residences, a measure of rents for non-rent-controlled residences in urban areas, is critical for future inflation prospects, as it is one of the largest components of CPI and is considered to be less volatile than other components. Movements observed in the series are, therefore, viewed as more structural in nature and thus have the potential to be “stickier.”
While one inflation release does not make a trend, it does show that some of the higher prices we were seeing over the past several months were likely transitory. Our base case remains that we think well above average consumer price increases will be temporary as the structural headwinds to higher prices (globalization, technology, instant price comparisons, etc.) remain in place. That certainly doesn’t mean we can’t continue to see higher prices in the near term, but we do think the pace of price gains slows over time.
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