Knowledge • News • Insights

In Partnership With

AP Lazer: Leading the Way

PNC Senior Economist Bill Adams: Inflation Slowed in July as Supply-Chain Related Surges in Select Price Categories Eased;

pncfsg CroppedFed will see the CPI report’s details as consistent with transitory inflation

The consumer price index for urban consumers (CPI-U or more commonly just CPI) rose 0.5% in July from June, matching consensus expectations, and slowing from June’s 0.9% increase. July’s CPI saw the lowest monthly increase since February. Energy prices rose 1.6% in July on a 2.4% increase in gasoline prices. Food prices rose 0.7% on the month, with food away from home up 0.8%.

The CPI excluding food and energy or core CPI rose 0.3% from June versus consensus expectations for a 0.4% increase, and down from a 0.9% increase in June. In July the core CPI had its smallest monthly increase since March. The categories that fueled a surge in core inflation in recent months rose more slowly or even fell in July. Used car and truck prices rose 0.2% after surging 30% from March to June; airline fares fell 0.1% after surging 21.6% from February to June; car and truck rental prices fell 4.6% after surging 64% from January to June. New vehicles were an exception, rising 1.7% in June after rising 4.1% from March to June. The cost of lodging away from home is still surging too, up 6.0% in July and up a cumulative 27% from February. These categories of prices are being affected by supply bottlenecks and surging demand coming out of the pandemic; as bottlenecks in semiconductors improve and auto manufacturers increase supply, the surge in prices of used, new, and rental cars will slow further.

Categories of core prices that have not been hit with the same pandemic-related surges in demand are rising much more slowly. In July, rent of primary residence rose 0.2% from June and was up 1.9% from a year earlier; owners’ equivalent rent of residence (what homeowners think their homes would rent for) rose 0.3% from June and 2.4% from a year earlier-the big increases in housing sale prices since the pandemic began haven’t flowed through to the CPI basket yet. Medical care services costs rose 0.3% from June and 0.8% from a year earlier, and medical care commodities rose 0.2% on the month and fell 2.1% on the year.

From a year earlier, the CPI rose 5.4% in July, tying June for the fastest year-ago increase since 2008, and the core CPI rose 4.3% after June’s 4.5% increase, which was the highest since 1991.

The Federal Reserve has been watching the first half of 2021’s surge in prices closely. The prices that jumped the fastest in the first half of 2021 were in categories of goods and services that have experienced severe supply bottlenecks, surges in demand, or both in the last few months. The auto industry’s supply chain woes are well-documented; and demand for hospitality services has surged faster than businesses could ramp back capacity as restrictions on activity were lifted.

The Fed will see July’s slower inflation as consistent with their expectation that most of the acceleration of inflation in the first half of 2021 was transitory. That doesn’t mean they expect prices to come down outside of the price categories with the craziest recent swings. Transitory means that the surge in inflation was from temporary causes: One-off stimulus measures, temporary supply chain bottlenecks, and swings in demand that caught businesses flat-footed. As these drivers of inflation fade, inflation should slow to a 2% to 3% pace; that’s what the Fed is hoping to achieve near-term to convince financial markets that U.S. inflation will average 2% over the longer run since inflation averaged below the Fed’s 2% target during the last decade’s long expansion.

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.

Image result for pnc financial services

What's Hot

Get the latest news from MBN right in your inbox

Sign up for our newsletter and never miss a beat.