- Sept. 22, 2021
- Last week's release of the latest CPI report showed that inflation moderated again in August, which we'd attribute in part to the passing of the base effects (moving past the year-over-year comparisons to the depths of the crisis) as well as some progress in supply-demand mismatches.
- Core inflation, while still quite high, eased to 4% last month, down from 4.5% in June. This is a welcome sign for the markets, as it's consistent with the Fed's stance that the surge in consumer prices will be transitory, allowing monetary-policy settings to remain accommodative.
- Underlying trends in the August inflation data offer a mixed take on the state of the economy. Used-auto prices (a key contributor to recent inflation pressures) declined versus the prior month, an indication that supply shortages are beginning to clear. Away-from-home food services rose at half the pace of the prior two months, perhaps reflecting some progress in labor shortages. At the same time, rather sharp declines in hotel room rates (-2.9%), airfares (-9.1%) and car-rental prices (-8.5%) compared with July is a clear indication of the impact the delta variant is having on consumer demand and activity within the travel, leisure and hospitality sector.
- In our view, the latest CPI report signals that peak inflation pressures are subsiding, but they're not disappearing. Our base-case expectation remains that inflation will recede but settle in at higher levels than we experienced over the last cycle. Moreover, labor shortages and supply bottlenecks will begin to clear, in our view, but more gradually than desired. Last week's University of Michigan Consumer Confidence survey showed a slight improvement from the previous reading, but also revealed a deterioration in reported buying conditions for housing, autos and durable goods, suggesting that high prices are likely to have a dampening effect on big-ticket purchases.
- Peaking inflation rates should take some pressure off of the Fed, allowing monetary stimulus to be withdrawn at a gradual pace, starting with our expectation for reduced bond purchases starting later this year. Looking at prior economic cycles since 1990, as inflation rates peaked in the recovery, the following year saw solid stock-market gains along with modest moves in interest rates.