July’s annual gain in consumer prices jumped by +5.4%.  The inflation measure rose +0.5%.

Consumer Prices Increased Quickly…Again

The US Labor Department’s Consumer Price Index (CPI) indicated that prices jumped +5.4% y/y in July.  (Economists surveyed by Bloomberg expectedpricesto rise +5.3%y/y.)  Monthly price gains came in at the anticipated increase of +0.5%.

Compared with the CPI increase of +0.9% in June from May, the CPI increase of +0.5% was more moderate.  However, the inflation rate is still going up faster than”normal.”

Pace of Inflation Expected

Economists almost unanimously agreed that prices would jump after slumping in pandemic-2020 yet the pace of that jump has been surprising.  Even so, yearly as well as monthly price gains are expected to moderate as businesses create coping mechanisms to deal with supply chain disruptions.

The key question for economic and government leaders is how quickly will yearly and monthly gains moderate?  If price gains are temporary, okay.  If price gains are persistent, there could be problems particularly if consumers come  to expect and then tolerate higher prices.

What to Know about Latest CPI Data

  1.  The Consumer Price Index (CPI) is NOT the Federal Reserve’s target measure.  The Fed is interested in an average 2% inflation rate over the long term  The Fed uses the Personal Consumption Expenditures (PCE) to measure inflation.  The PCEindex has been up, just not as much as the CPI…but, still.
  2. The driving factor behind inflation gains is “the base effect,” not the pandemic shutdown.  The base effect, the  amount prices dropped during pandemic lockdown for plane tickets and hotel rooms, for example, measures last year’s prices against today’s prices.  Now, the base effect is fading as base effect prices are beginning to rise as the economy reopens.
  3. “Fast” inflation becomes a problem only if inflation remains fast.  According to Charles Evens, president of the Chicao Federal Reserve Bank, said, “The question is more, what the inflation outlook is going to be into the next year, 2022, and 2023?”

Fed officials are closely watching wage increases and consumers’ expectations about inflation.  If higher wages really do take off, employers will likely charge more to cover those costs.  If consumers and businesses expect higher prices, they could be more willing to pay them.

Time will tell.  Jerome H.owell, the Fed chair, is, for now, staying the course.  Powell recently said, “My best estimate is that this is something that will pass…it’s really a shock to the economy that will pass through.”

Thanks to The New York Times.

Claim Your FREE Real Estate Treasure Map!