Is the biggest burst of U.S. inflation in decades finally over? Don’t bet on it just yet.
The government on Tuesday said the cost of living rose 0.3% in August to mark the smallest gain in seven months.
What’s more, the rate of inflation over the past year dipped to 5.3% from 5.4%. It was the first decline since last October.
Good news, to be sure, especially for the Federal Reserve. Chairman Jerome Powell and top central bankers have insisted for months that the increase in inflation was just a temporary phenomenon tied to the reopening of the economy.
Or “transitory,” in Fed speak.
The Fed may well be right, but the August report on consumer prices wasn’t as good as it looked. Indeed, the stock market
turned lower after investors sifted through the findings.
For one thing, the relaxation in price pressures was largely confined to just four categories: Used vehicles, auto insurance, airfare and hotel rates.
The decline in used-car prices was expected after a record surge in the spring. Soaring prices earlier this year contributed heavily to the uptick in inflation. Used-vehicle prices are also likely to continue to decline. That will ease some upward pressure on the consumer price index, the government’s main tool for measuring inflation on Main Street.
Auto-insurance rates, on the other hand, probably haven’t changed much during the pandemic. The government’s method of adjusting prices for seasonal variations has gone haywire for some products and services — and auto insurance appears to be one of them.
The drop in airfare and hotel rates, which were particularly steep last month, was more surprising. The cost of plane tickets sank 9.1% and room-rental charges fell 3.3%.
Both of these declines likely reflect hesitation on the part of Americans to travel during August amid a flareup in Covid cases caused by the delta strain. Looking ahead, it’s reasonable to expect airfare and hotel rates to rebound as delta fades.
Other inflationary pressures, meanwhile, could emerge in areas that have been relatively quiet over the past year.
Take housing, which makes up 40% of the CPI. Home prices have been rising sharply and rents could soon follow suit after the end of a nationwide eviction moratorium.
Medical costs have also been surprisingly subdued as Americans avoided elective procedures. That will also change.
Then there’s labor costs.
Wages are climbing at the fastest pace in more than a decade. Companies desperate to hire more workers are raising wages because they can’t find enough qualified applicants. It’s reasonable to expect companies to try to pass those costs onto to customers.
Finally delta has thrown another kink into the forecast.
COVID has caused massive disruptions in global trade, and if the delta variant adds to the problem, it could prolong the widespread shortages of supplies that have triggered the surge in inflation this year. Companies have to pay higher prices for raw or partly finished materials because they are in such short supply.
Even after a slowdown in August, inflation is still running 2 1/2 times higher than the Fed’s 2% target. It’s bound to fall, but how quickly and how much are still very much an open question.
“For now, this is a clear win for the ‘transitory’ camp, but it is unlikely to settle the inflation debate,” said chief economist Aneta Markowska of Jefferies LLC.