The US Bureau of Labor Statistics released the latest Consumer Price Index (CPI) data on Thursday, showing that consumer prices rose 3.2% for the 12 months ending in July. This compares to 3% in June and is the first month in a year’s span that the annual inflation rate accelerated.
However, the monthly increase in CPI was only 0.4% in July, down from 0.6% in June and 0.8% in May. This suggests that inflation may be peaking and starting to slow down, as some of the pandemic-related factors that drove up prices earlier this year are easing.
The core CPI, which excludes volatile food and energy prices, rose 0.2% for the month, bringing the annual rate to 4.7%, a notch below June’s 4.8%. This was the smallest monthly increase in core CPI since February.
Which sectors contributed to inflation?
The main drivers of inflation in July were food, energy, shelter, and transportation services. Food prices rose 0.7% for the month and 3.4% for the year, while energy prices rose 1.6% for the month and 23.8% for the year. Gasoline prices increased 2.4% for the month and 41.8% for the year.
Shelter costs, which account for about a third of the CPI basket, rose 0.3% for the month and 2.8% for the year. Shelter inflation was mainly driven by rising rents and hotel rates, as demand for housing and travel rebounded from the pandemic lows.
Transportation services, which include airfares, car rentals, and public transportation, rose 1.1% for the month and 6.4% for the year. These sectors were also affected by the recovery in travel activity and the supply constraints in the auto industry.
Why some economists are not worried?
Despite the higher-than-expected annual inflation rate, some economists are not worried about a sustained surge in prices that could force the Federal Reserve to tighten its monetary policy sooner than expected.
They argue that inflation is largely driven by temporary factors that are related to the reopening of the economy after the pandemic-induced lockdowns, such as supply bottlenecks, pent-up demand, base effects, and fiscal stimulus.
They expect these factors to fade over time as supply chains normalize, demand shifts from goods to services, and fiscal support wanes. They also point out that some of the sectors that saw the biggest price increases in recent months, such as used cars, airfares, and car rentals, have started to moderate or even decline in July.
They also note that inflation expectations, which measure how consumers and businesses anticipate future price changes, have remained stable or declined slightly in recent surveys. This suggests that inflation is not becoming entrenched or self-fulfilling.
What the Fed thinks?
The Federal Reserve has maintained that inflation is transitory and that it will not react prematurely to temporary price pressures. The Fed has set a target of 2% inflation over the long run, but it has also adopted a flexible average inflation targeting framework that allows it to tolerate periods of above-target inflation after periods of below-target inflation.
The Fed’s preferred measure of inflation is the core Personal Consumption Expenditures (PCE) index, which tends to run lower than the CPI. In June, core PCE rose 4.2% annually, according to Commerce Department data.
The Fed has also emphasized that it will not raise interest rates until it sees substantial further progress toward its dual mandate of maximum employment and price stability. The Fed has kept its benchmark interest rate near zero since March 2020 and has been buying $120 billion worth of bonds per month to support the economy.
The Fed’s next policy meeting is scheduled for September 21-22, when it will update its economic projections and possibly provide more guidance on its plans to taper its bond purchases.
