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Thursday, August 12, 2021
But other signs emerge of inflation sticking around
In a July press conference, Federal Reserve Chair Jerome Powell was asked to define this summer’s biggest buzzword in markets: transitory.
“The concept of transitory is really this: It is that the increases will happen,” Powell said. “We’re not saying they will reverse. That’s not what transitory means […] what I mean by transitory is just something that doesn’t leave a permanent mark on the inflation process. Again, we don’t mean…producers are going to take those price increases back. That’s not the idea. It’s just that they won’t go on indefinitely.” (Emphasis added.)
And the July inflation report gave us some clean examples of what the Fed chair is talking about.
On Wednesday morning, the Bureau of Labor Statistics released the Consumer Price Index for July, which showed prices rose 0.5% over the prior month, and 5.4% over last year on a headline basis. On a “core” reading — which strips out food and energy — prices were up 0.4% over the prior month, and 4.3% over last year.
But as we discussed last month following the release of the June data, the inflation conversation right now is about two different dynamics: Price increases that might prove to be transitory, and those that could be more durable.
And on the first point, July offered some clarity.
“This month revealed significant cooling in transitory inflation,” said economists at Bank of America Global Research. The firm cited both used car prices, which rose just 0.2% month-on-month, and airline fares, which fell 0.1% from last month, of examples of categories impacted by re-opening factors that cooled off notably in July.
In other words, price increases in these categories recorded in prior months are proving to be temporary.
“The softer rise in core prices mainly reflected much smaller price increases in most of the pandemic-affected sectors that had driven stronger gains in previous months,” said Andrew Hunter, senior U.S. economist at Capital Economics.
“The latest data on wholesale auction prices suggest that used vehicle prices will decline outright in August which, if sustained, could become a more significant drag on core inflation over the coming months,” he added.
And as we see on the following chart, both categories saw a surge in prices as demand for vehicles and demand for air travel spiked into the summer. But with high prices tapping some buyers out of the used car market — and the spread of the Delta variant impacting some travel behaviors — these pressures have waned.
But…
Read More: July data reveals ‘significant cooling in transitory inflation’: Morning