Sep 15, 2021 - Economy & Business

Economists caution against declaring victory over inflation

Data: FRED; Chart: Axios Visuals
Data: FRED; Chart: Axios Visuals

The pace at which consumer prices rose in August cooled off by more than expected. But economists are stopping short of declaring that inflation has been transitory.

Why it matters: Since the beginning of the year, the rate of inflation has been above average.

  • However, much of it has been driven by supply chain issues amid a rapidly reopening economy, which has led many to argue that this recent bout of inflation is transitory.

By the numbers: The core Consumer Price Index, which excludes food and energy prices, rose by just 0.1% month over month in August.

  • This was a significant deceleration from the 0.3% increase in July. Economists had expected August's price growth to come in at 0.3% again.
  • The prices of used cars and trucks, which had been particularly hot due to supply chain disruptions, fell by 1.5% during the month.
  • Hotel and motel prices and airline fares, which were boosted earlier this year by the rush to travel, fell by 3.3% and 9.1%, respectively.

What they’re saying: While a lower-than-expected inflation reading may be welcome news to the Federal Reserve, which has been keeping monetary policy very loose, economists caution against declaring victory on rapidly rising prices.

  • “The winds of transitory inflation became crossed this month,” Bank of America U.S. economist Alexander Lin said. He noted that while prices for some notable items fell, prices for other items — including new cars, home furnishings, recreational goods and apparel — rose significantly.

Between the lines: There’s also the matter of the recent resurgence in COVID-19 cases putting a damper on demand, which in turn has helped prices cool.

  • Goldman Sachs chief economist Jan Hatzius wrote that “Delta-sensitive categories contributed -0.13pp” to the monthly decline in core CPI, adding that this “could reverse in coming months if cases continue to fall.”

What to watch: The next few consumer inflation reports will bear watching to see if prices continue to cool, which will be at least partly dependent on the direction of COVID infections.

  • “Inflation from February to July was extraordinarily high: core CPI rose at an 8.0% annual rate,” Jason Furman, a Council of Economic Advisers chairman for President Obama, tweeted. “We always knew that inflation would not continue at an 8.0% annual rate."
  • "The question is will it slow to something like 2% (the Fed's view) or something meaningfully higher (my view).”
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