WASHINGTON, DC – MAY 18: Sen. Rick Scott (R-FL) speaks before a Senate Republican Policy luncheon at … [+] the Russell Senate Office Building on May 18, 2021 in Washington, DC. Scott spoke on inflation and the rising cost of goods prior to the meeting. (Photo by Kevin Dietsch/Getty Images)
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June’s Personal Income and Outlays Report saw inflation rising at a 4% annual rate. That’s at the same headline rate as the May report perhaps giving some support to the idea of transitory inflation. However, inflation excluding food and energy, nudged up slightly from 3.4% in May to 3.5% in June.
Those advocating for transitory inflation, expect to see inflation start to moderate from here. This report lends a degree of support for that view. The more extreme spikes in inflation that we’ve seen over recent months could be ending, though we have yet to see inflation actually fall. Maybe we could see that in the August data.
U.S. policy makers generally believe that inflation will moderate over the coming months, both the Fed and President Biden have shared this view. However, several CEOs are more skeptical, believing inflation may last longer.
Underlying Data
The underlying data showed food prices increasing at a slower rate than earlier in the year. Energy prices continue to rise the most of major categories, showing a rise of over 20% year-on-year. The rate of increase for services and durable goods, such as cars and washing machines, showed their fastest rate of increase for the year so far. However, non-durable goods such as clothing and laundry detergent increased at a slightly slower rate than previously. As such, the picture is relatively mixed, but there could be some support to the view that we may be close to the peak in inflation. Still, inflation’s overall level remains very high compared to recent decades.
Market Implications
The big question remains as to whether inflation is transitory, meaning it should decline into 2022, or whether it will remain with us for some time. This report starts to show some evidence that inflation could have peaked. However, with prices still rising 4% year-on-year it may be too early to call it for the transitory inflation view.
This matters for markets because rampant inflation is almost never good for asset prices such as stocks and bonds. However, for now, the markets have taken a broadly optimistic view of the inflation picture. The data isn’t necessarily supporting that quite yet, but there are early signs that inflation could be moderating into future months.