Fed Chair Jerome Powell may be encouraged by the most recent CPI data. (Photo by Eric BARADAT / AFP) … [+] (Photo by ERIC BARADAT/AFP via Getty Images)
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The first of the August inflation data we were watching for is in. Inflation is still high, but its growth may be slowing. That provides some ammunition for those who believe in transitory inflation as both the Fed and the President appear to. July CPI inflation rose at 5.4% year-on-year. That is a big number, but importantly, its not any bigger than last month.
However, perhaps the good news is that both the month-on-month change and looking at the series excluding food and energy grew at a slower rate than the prior month. That may not sound like good news when inflation is running at 5.4% but these might be the first, early signs that perhaps we are through the worst of the inflation surge. We saw a similar picture in PCE prices last month.
Equally, this could also be just noise in the data, since measuring prices on a monthly basis is far from easy, and still July’s data is less bad than June. However, July is still as high or higher than two thirds of the month-on-month readings for the past 12 months.
Overall though the numbers are something of a mixed bag. Yes, used cars and truck prices are no longer surging, but now new cars are rising in price. Yes, air fare price highs might have come to a end, but hotel pricing continues to rise. The July data is pretty finely balanced, for every source of encouragement, you can find an offsetting concern, but maybe the overall outcome is still a little better than it looked last month when concerns largely dominated without many encouraging signs.
Also, more fundamentally, even if the worst of the rises in inflation have ended, then we still need to see it fall. Of course, a plateau in inflation is typically necessary before a decline, but that doesn’t mean the decline will come. If prices remained rising at July’s somewhat lower level, inflation would still be a big challenge for policy makers.
So maybe this is an early, small victory for those in the transitory inflation camp. For inflation to fall, first it needs to stop growing so rapidly and July’s data perhaps offered that. That said, reading monthly data is challenging. For example, May offered a similar picture as inflation’s growth fell back from the prior month. Of course, that was just noise as price growth then accelerated in June.
So the recent CPI data is a very early, mildly promising sign that the most extreme inflation surge could be ending. That said, future months will have to back up that picture.
Furthermore, even if the inflation of 2021 proves transitory, where inflation ends up over the next few years remains a key question for markets. The bond markets, given very low yields, continue to show some concerns that once we are through this inflationary episode (if indeed we do get through it) we may then return to a bout of deflation or falling prices.
That’s part of the Fed’s challenge. They want inflation to fall back, but need it to fall back to around 2% and not much lower than that while keeping other variables like employment on course. So even if inflation is transitory the Fed will still have many things to worry about. The life of a central banker is never easy.