Tuesday, September 14, 2021
After a crazy summer of nosebleed inflation readings, we may finally be starting to see signs of transitory inflation.
The Bureau of Labor Statistics released the August Consumer Price Index (CPI) data this morning, which came in softer than expected. Headline CPI climbed 0.3% month-over-month vs. estimates of 0.4%, while core CPI jumped only 0.1% month-over-month vs. estimates of 0.3%. Base effects from rolling off weak numbers a year earlier meant the year-over-year numbers were larger, but we find more usefulness in the monthly numbers until we get past the weak comparisons versus a year ago.
To be sure, a resurgent Delta variant played a part in dampening overall inflation, and future reports will help clarify the magnitude of its effect—but, expectations were already lowered to account for this dynamic and the data still missed.
One major takeaway from the report is that the composition of the decline suggests that the long-awaited abatement in price spikes in supply-constrained segments of the economy could be upon us. These relatively smaller parts of the overall CPI basket were driving an outsized portion of the gains this summer. Used cars and trucks (-1.5%), airfare (-9.1%), and lodging away from home (-3.3%) all declined significantly month-over-month.
“’Transitory’ has certainly been lasting longer than we originally thought it would,” said LPL Financial Chief Market Strategist Ryan Detrick. “But the CPI components that displayed summer volatility resulting from supply chain bottlenecks are beginning to resolve themselves as expected.”
As seen in the LPL Chart of the Day, used car and truck prices have experienced a drop-off after the summer surge, which saw them become the posterchild for bottleneck-driven inflation from semiconductor shortages.
As we have highlighted in previous inflation blogs, we make special note of the trend in rents since they are viewed as “stickier” parts of the inflation outlook and count for more than 40% of the overall calculation. Moreover, the Delta variant likely has less of a direct effect on rents compared to some of the other components mentioned earlier. As such, owners’ equivalent rent of primary residences rose 0.25% month-over-month, down slightly compared to the prior two months, a modest pace that is unlikely to spook even the most hawkish inflation watchers.
Gauging the Federal Reserve’s reaction function to inflation and jobs data is fast becoming the market’s primary focus. Following August’s weak payroll report, market participants have mostly pushed back their expected timelines for tapering asset purchases so long as inflation does not spiral out of control in the meantime. Judging by the early market reaction, today’s softer inflation numbers are confirming that narrative.
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