The consumer price index (CPI) increased by 0.4% in September, as surging food and energy costs lifted headline inflation by more than the 0.3% that economists had forecasted for the month. That increase lifted the 12-month increase to 5.4%, slightly higher than the August reading.
The 12-month consumer price index reading has now been at or above 5.0% for five consecutive months — particularly noteworthy in an economy that had been characterized in part by exceptionally low inflation for much of the past decade.
Underneath the surface of that unexpectedly strong top-line increase shows that some of the key recent drivers of surging prices may be easing. Energy prices rose again in September, but the 1.3% increase was less than half of the 2.7% increase in August and the smallest increase since May. Perhaps more notable for many consumers was a comparable easing in the surging price of gasoline.
Core inflation, which strips out volatile food and energy prices, rose by just 0.2% for the month and 4.0% over the preceding 12 months. Perhaps most notable was a modest dip in used car prices, a small part of the index, but one that has disproportionately impacted the CPI over the past year. Used car prices were up over 45% in the 12 months ended in July, as strong demand for automobiles outstripped inventories and supply chain disruptions crimped new vehicle production. Those supply chain bottlenecks still exist though, so declining used car prices may prove to be temporary.
Prices in certain sectors associated with the economic reopening including airfares and lodging also experienced a pullback in prices, supporting the idea that the recent inflationary surge may be transitory.
Other components, including most notably the heavily weighted housing sector, may still not peak for some time. Strong demand for housing coupled with limited supply of homes available for sale pushed home prices up this year, but the effect is seen at a lag in the CPI. As a result, even if housing prices roll over, the housing component of the index could continue to rise for some time thereafter.
The slowing pace of economic growth could help to alleviate price pressures in the coming months but won’t be enough to address the pervasive, persistent limits on the economy’s supply side. The labor market remains exceptionally tight. The number of job openings has declined moderately from record levels, but with over 10 million openings nationally in August, the demand for workers is still great. Filling those openings? That remains a major challenge, and the competition for a dwindling pool of available workers has contributed to the largest year-on-year gains in average hourly wages since the 1980s.
Similarly, global supply chain disruptions continue to constrain the availability of many goods. The challenges are broad — from factory shutdowns in Asia to record numbers of container vessels parked off the coast of Southern California to a shortage of long-haul truckers to move goods across the country. Slower demand growth could help at the margin, but these issues can’t and won’t be resolved overnight.
The ultimate question related to inflation is “how transitory is transitory?” Even the Fed has started to adjust its expectations about the near-term outlook. The good news is that long-term inflation expectations remain reasonably well-anchored. Inflation pressures are still expected to ease next year, but there’s a growing sense that they may not fall back as rapidly as previously believed.
The result? An extended period of 70s-style inflation still seems highly improbable, but a return to the sub-2% inflation norm that characterized much of the last decade is also unlikely. Price pressures should ease as economic conditions normalize, but consumers should be prepared for elevated inflation above the Fed’s 2% target to be with us for some time to come.
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