The Ease in Inflation
The most anticipated news item this week was Wednesday’s release of the July consumer price index (CPI). The eagerness surrounding the release was driven by ambiguity over the potential magnitude of inflation and whether it might offer any clues on how the Federal Reserve might adjust its posture around the pace of its monthly bond purchases. The July statistics turned out to be rather anticlimactic, resulting in both the stock and bond market barely budging during Wednesday’s trading session.
July’s report showed the Consumer price index increasing +0.5% from June levels. The annualized rate of inflation remains at 5.4%. Within the data, what stood out was some of the items driving inflation in previous months, namely commodity, travel and used car prices, returned to more moderate levels. Food costs remain elevated as did new car prices. As we take a step back and assess this data, its clear some of the ‘transitory’ items that have been talked about are now working their way out of the inflation data.
It is important to recognize given the significance of the brief 2020 recession, and the magnitude of the demand driven recovery in 2021, economic data is unlikely to trend in a linear fashion. The chart below, courtesy of this month’s Bureau of Labor Statistics report on CPI, highlights the more recent variability in readings.
Source: Bureau of Labor Statistics, Consumer Price Index – July 2021.
Our assessment is that July’s inflation data was encouraging in that it helped to cull out some of the transitory impacts we are seeing. There are transitory impacts that remain, and we may begin to see them roll off as we get further into 2021. Alternatively, we are seeing increasing wage pressures which may gradually translate into higher prices over the coming months. July represents just one data point, but it did help to confirm the notion that we will begin to see some easing from transitory pressures.
There have been an increasing number of Federal Reserve Open Market Committee (FOMC) members that have publicly stated support around beginning to tapper (or reduce) the Fed’s pace of monthly asset purchases. The anticlimactic nature of the July inflation data would seem unlikely to be enough to change these views. The economic puzzle includes many pieces that must be assembled over time. For this one piece on inflation, and this one particular point in time, it provides some encouragement that inflation just might be kept in check.
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The Consumer Price Index (CPI) measures the performance of US inflation (not seasonally adjusted) which is the rate of change of consumer goods prices. It measures of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. The data is from Bureau of Labor Statistics. The value of the current month CPI is estimated by the average value of the previous two months CPI. An index is not a security in which an investment can be made, as they are unmanaged vehicles that serve as market indicators only and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.
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