Is Inflation Cooling and Putting in a Top? by David Haggith for The Great Recession
To keep it simple: Nope! Not this time anyway. That is, however, what you hear from the wistful market makers who want to see last week’s CPI release as proof inflation was “transitory.” Let me disabuse you of that fantasy entirely.
Inflation took a breather. It didn’t fall. It climbed, but not as much as each month’s climb had been before.
It’s reasonable to think, if you are a mere surface scratcher, that the subtle decline in inflation’s rate of rise might mean inflation is already tiring. It’s also easy to think that inflation is putting in a top if you like to think that things are going to go the way you want them to go in order to keep yourself happy. However, a deeper look will completely dispel that notion because the forces that are causing inflation are nowhere near letting go of us.
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First, the CPI numbers
Core CPI, which is the number you will see the Fed using all the time, versus the broader headline number, actually rose quite a bit at 0.33% added to tracked prices in just one month. To put that in perspective, if monthly inflation actually did stabilize at that level, it would still add about two more percentage points to the 2021 annual inflation rate by the end of the year (when compound each month) above the high number we already have in annualized inflation. So, the decrease in the rate of rise wasn’t much of a rest.
Energy leaped up 1.7% in just one month, and food prices jumped 0.7% over the month.
According to BofA – and judging by the market’s delighted kneejerk response – this month revealed significant cooling in transitory inflation. First on the goods shortages theme: used car prices edged up 0.2% mom, even though new cars were much stronger at 1.7% mom.
Due to the rapid rise in used-car prices in earlier months (up 41% for the year so far with new cars only up 6% for the year so far), some joked that we are seeing
an example of carbitrage, where “people buy new cars then flip them for profit as used cars.”
Medical care costs and owner-equivalent rent (the Bureau of Lying Statistics’ mischievous way of distorting the true cost of homeownership) each rose 0.3% month-on-month. Price increases in those categories tend to hang around once they rise.
While we added more inflation to a year that will already come in hot by year’s end, even if we added nothing for the remainder of the year, many price categories came in calmer than in previous months where each month has, up to now, been worse than the prior month. Thus, the sigh or reprieve in some quarters.
Another way of looking at this is with the following “heat map” for year-on-year cost-of-living increases, where (perversely in my way of seeing things) green equals hotter inflation and red equals cooler inflation:
