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September 14, 2021 Blog 2 min read
Consumers felt the impact of rising prices in August, but growing evidence that the pace of price increases may be topping out should provide some relief. However, inflation gauges aren’t likely to return to the pre-pandemic norm anytime soon.

CPI YoY (% change) - HistoryThe consumer price index (CPI) rose by 0.3% in August from the month prior, modestly below expectations for a 0.4% increase. Core inflation, which excludes more volatile food and energy prices, rose by just 0.1% for the month. The 0.3% print was the lowest monthly increase since January, a sign that the brisk pace of monthly price increases continues to slow since peaking at 0.9% in June.

Inflation gauges have surged since the beginning of the year, as consumer demand soared while a variety of factors crimped the supply of a wide range of goods and services. On a 12-month basis, the consumer price index reading of 1.4% in January marked the low point for 2021. In August, that reading edged modestly lower to 5.3% — just a notch below the peak of 5.4% in each of the preceding two months.

More notably, core inflation, which excludes volatile food and energy costs, slipped to 4.0% last month, edging down from its recent 4.5% peak in June.

While annual inflation figures have remained well above the Fed’s target of 2% for much of the year, there has been an outsized effect from price increases concentrated in just a few sectors. Notably, those were directly affected by the reopening of the economy, such as auto sales, hotels, and airline tickets. The sharp increase in prices this year reflects the release of pent-up consumer demand coupled with supply constraints, as businesses struggled to keep up with increased demand exacerbated by labor and supply shortages.

The August outright price declines for used vehicles, airline fares, and hotel prices are noteworthy given their sizable price increases in recent months. Transportation-related costs declined 2.3%, and hotel/motel prices were down 3.3% for the month. Softer pricing for travel-related expenses may reflect some pushback against recent price increases by consumers but likely also reflects changing behaviors in response to the risk created by the recent COVID-19 Delta-variant surge.

Although indications that price pressures may be easing are a welcome sign, inflation pressures are likely to remain above the sub-2.0% range that characterized much of the past decade. Rising labor costs and surging home prices aren’t fully reflected in CPI data and are likely to continue to put some degree of upward pressure on prices in the coming months.

The August inflation report provides additional support for the Fed’s “transitory” inflation narrative. Coupled with the soft August jobs report, signs of the ebbing pace of rising prices may provide the Fed with a bit more leeway in determining when to begin to pare back its bond purchases. Although that first step will almost certainly be incremental, it will be directionally significant. Economists and investors alike will continue to monitor comments from Fed officials for any hints about the timing and magnitude of that first step and what it may indicate for the path ahead for monetary policy.

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