Inflation has been showing signs of heating up, boosted by the strength of the economy and increasingly tight labor market conditions. The pace of price increases may have moderated in August, but that is likely to only be a temporary reprieve.
The consumer price index (CPI) increased by 0.2% in August from the month prior, in line with expectations. Excluding the usually more volatile food and energy prices, core CPI edged tepidly higher, rising by 0.1% in August, which was less than anticipated.
Over the past year, the index rose by 2.7%, the softest result since April. Core inflation increased by 2.2% over the preceding twelve months, also down modestly from July.
Over the past several months, the U.S. dollar has strengthened substantially, which has helped to keep a lid on import prices and inflation. Still, with the jobless rate below 4.0% and the increasing demand for workers outstripping the supply of skilled candidates, wage growth is accelerating. In the absence of stronger productivity gains, those rising labor costs are going to show up in rising prices for goods and services.
The wild card is the continuing trade tensions, tariffs, and resulting disruptions in the flow of goods. Thus far, the economy appears to be weathering that brewing storm quite well, but these factors also have the potential to contribute to rising prices in impacted industries as well. The effect thus far has been limited, but it remains a source of potential concern with the potential for the situation to escalate further.
Certainly, by historical standards, inflation of 2-3% isn’t problematic for the economy, but is more noteworthy given the experience of the past decade. Inflation is building, albeit slowly. Viewed in the context of tight labor market conditions, it’s clear that the Fed is well positioned to continue to gradually ratchet up interest rates. Consumers will experience the negative side of rising prices, but stronger wage growth – if it continues – should blunt the impact.
All of this points to an economy that is growing, but in the latter stages of the expansion, as conditions become increasingly tight. Still, there appears to be ample room for continued growth, as monetary policy is far from tight, and there are few signs of excesses in the economy in need of a purge.
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