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The monthly rate of change in the Consumer Price Index has been slowing but a more detailed look at the inflation picture suggests that this will likely be temporary, and the index will likely increase in coming months.

The rate of monthly increase in the Consumer Price Index (CPI) during August slowed month over month to 0.30%, the smallest increase since January 2021.  The month-over-month (MoM) increase peaked in July at 0.90% and this has led to some discussion as to whether inflation may have peaked.  Looking at the underlying CPI data and some other indicators, we continue to think that the rate of change in inflation will likely increase through the rest of 2021. 

Source: FRED.

In the monthly CPI report, there were large decreases in areas that have been impacted by a reduction in travel, with airline fares down -9% and hotels down -2.9%.  These reductions may be temporary and could increase again if travel activity reaccelerates. 

 Source: FRED.

Used car prices declined which should continue to happen as prices start to normalize back to pre-COVID levels.  At the same time, new car prices continued to increase at more than 1%.  This could continue as car inventories are at record lows, and supply chain issues are likely to persist as car companies have been announcing production cuts.  New car prices are also a slightly larger portion of the CPI calculation than used car prices.

Source: NDR.

Source: FRED.

Commodity prices have continued to increase in the month of September and the overall index is at a higher level than the end of August.  Energy prices are a large component of the CPI calculation and have increased 2% in August even with oil prices (WTI) declining in August.  Oil and natural gas prices have increased in the month of September and without a material decline into the end of the month, energy prices will likely increase again in the next CPI calculation.

Source: FRED.

Source: Koyfin.

Shelter is the largest component of the CPI calculation, and it has been well below the pre-COVID trend since early 2020. 

Source: FRED.

A major contributor to the weakness in shelter prices has been rental rates.  This is starting to reverse and rental rates increased in August at the highest level since September 2019.  The year-over-year (YoY) change is 1.5% below the pre-COVID pace, so there is likely a lot of near-term upside potential in rental rates if they just return to the prior trend.

Source: FRED.

The other portion of shelter prices that has been below trend is owner’s equivalent rent.  This is a measure of what homeowners think their house could generate in rent, as a proxy for measuring home price appreciation.  This metric has historically followed home prices but has been increasing at less than 3% YoY compared to 15-20% growth for home prices. 

Source: FRED.

The underlying components of the CPI basket are suggesting that there is likely more upside pressure to the headline index in the coming months.  Some of the broader measures of inflation are also suggesting that price increases are reaching more areas and could continue to move up in the coming months.

The trimmed-mean CPI (which adjusts for large increases or decreases in certain components) increased 3.2% YoY in August.  This was the largest increase since October 2008. 

Source: NDR.

The median CPI increased 2.4% YoY but remains well below the headline level and the 3% mark reached prior to COVID. 

 

Source: NDR.

The deceleration in the monthly rate of change in the headline CPI level will likely lead to more conversations about inflation levels peaking and the rate of change moving back toward pre-COVID trends.  Our analysis of the underlying components of CPI and other market data suggest that CPI will likely start to reaccelerate in the coming months and the rate of change will likely remain well above pre-COVID levels throughout 2021. 

 



 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

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