U.S. consumer prices continued to rise in July
The consumer price index (CPI) rose by 0.5% in July, lifted predominantly by higher food and energy costs, a result that was in line with forecasts. Core inflation rose by 0.3% — still elevated but notably also the smallest monthly gain since March.
Over the past 12 months, the CPI rose 5.4%, which is unchanged from June. The 12-month increase of 4.3% for the core index that excludes food and energy represented the first dip in that gauge since February.
Consumer prices have risen sharply over the past year as the economic recovery gathered momentum despite supply constraints for various goods and an increasingly challenging labor market for employers. Policymakers have consistently made the argument that resurgent inflation would be a temporary phenomenon and consumer inflation should recede back toward the Fed’s 2% target over time. To this point, most indications suggest that consumers and investors have largely accepted that argument.
The good news is that there are signs that the pace of inflation may be topping out. The pace of price increases appears to be slowing, supported by a marked decline in some commodity prices, although that was only part of the story. In recent months, outsized gains were driven by a range of factors, perhaps most notably the growing scarcity of certain finished goods (e.g., automobiles) and the returning pricing power for certain services associated with increasing American mobility, including transportation, travel, and hospitality. The latter benefited from more Americans traveling as the summer months approached and the evident decline in COVID-19 cases. That sharp pickup in demand enabled the service sector beneficiaries to also raise prices from depressed levels.
That’s not to suggest that consumers aren’t going to continue to feel the pinch in the coming months. Looking ahead, it’s likely that inflationary pressures could ease, but still remain well above the Fed’s 2% target for some period. Surging housing costs, for example, usually appear in the index component of the index with a lag. Given its significant relative weighting as nearly one-third of the index, the potential for further price increases in shelter costs into next year could be a key determinant of how sticky higher inflation will be and how rapidly the CPI will recede toward a more palatable level.
Coupled with the strength of the July jobs report and expectations for strong payroll gains in the near term, the key question is whether or not the Fed is seeing enough “substantial further progress” to transition from talking about tapering its bond purchases to actually doing so.
The July inflation report seems to give a little something to both the hawks and the doves within the Fed. Those focused on the level of inflation will likely see this as an indication that the case for tapering is increasingly clear, particularly given the state of the labor market and expectations for strong payroll gains in the near term. Conversely, doves in the Fed may focus on indications that the pace of price increases may be topping out with the potential to ease in the coming months. If inflation is starting to ease, how urgently does the central bank need to start to remove its accommodation?
Ultimately, the debate around tapering is about timing and pace. Given the Fed’s dual policy mandate of maximum employment and price stability, the runway continues to shorten.
The bottom line? Consumers continue to contend with rising prices to a degree that has been nonexistent for over a decade. That’s not going to change overnight, but there is at least some evidence that the pace is slowing.
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