The consumer price index rose 0.2 percent in September, down from a 0.4 percent increase in August and 0.6 percent increases in July and June. The core index, excluding food and energy prices, was also up 0.2 percent in September; it rose 0.4 percent in August and 0.6 percent in July.
On a year-ago basis, overall inflation was 1.4 percent in September, up from 1.3 percent in August and 0.1 percent in May. Core inflation was 1.7 percent year-over-year in September, unchanged from August and up from 1.2 percent in May and June.
Inflation has been on a roller coaster ride lately, but now things are settling down. Prices actually declined in aggregate in the late winter and early spring as demand plunged for many good and services, especially energy, air transportation, and used cars and trucks. Prices then rose as the recovery from the Viral Recession got underway in mid-year. Now price gains are modest as supply chain disruptions have eased and weak demand and excess capacity in many parts of the economy have limited firms’ pricing power. According to respondents to PNC’s recent semiannual survey of small and mid-sized businesses, inflationary pressures have declined from the spring, both for the inputs they use and the prices they charge their customers.
After slowing in mid-year because of the Viral Recession, both core and overall inflation have picked up somewhat on a year-ago basis. The Federal Open Market Committee would like inflation to average 2 percent over the medium term, using the personal consumption expenditures price index, which tends to run a bit more slowly than the CPI. Both overall and core CPI inflation are well below that objective, and have been below it for most of the past decade. Thus the central bank would like to see inflation move somewhat above 2 percent, at least for a couple of years. As long as inflation remains below 2 percent the FOMC will keep its short-term policy rate, the fed funds rate, in its current range of 0.00 to 0.25 percent, providing stimulus to the economy. PNC expects the FOMC to keep the fed funds rate in this near-zero range at least into 2024. The FOMC may also try to push long-term interest rates even lower, to spur a stronger economic recovery and inflation of above 2 percent.
PNC expects inflation to remain modest in the near term as aggregate demand remains weak due to continued fallout from the pandemic. Wage pressures will also be soft as the economy continues to deal with high unemployment, giving workers little bargaining power. Inflation will gradually pick up over the next few years as the economy and the labor market recover.
Much of the increase in prices in September came from used cars and trucks, which have been in extremely short supply in recent months. Energy prices also rose over the month, although they remain down substantially from September 2019 as the pandemic continues to weigh on energy demand, especially from the transportation sector.
The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.
