The major contributors to the surge in inflation didn’t change in August. Gasoline prices rose a whopping 32.5% y/y, owing to production cuts and disruptions in the wake of Hurricane Ida. This more than offset the decline in demand due to the rise in the Delta variant, causing a sharp slowdown in China and other hard-hit regions. The homeowners’ replacement cost index, related to the price of new and existing homes, rose to 14.3% in August–the largest annual increase since September 1987. Similarly, the other owned accommodation expenses index, which includes commission fees on the sale of real estate, rose 14.3% year over year in August. The easing of travel restrictions boosted demand for airfares and hotel accommodation when labour shortages and rising energy costs pressed these industries. Meat prices have also surged in the past year as restaurant demand spiked. Auto sector prices continued to rise sharply as the inventories of new vehicles, disrupted by the chip shortage, hit new record lows.
Bottom Line
As the first chart below shows, the US has posted the highest level of inflation in the G-7, as the economic rebound there has outpaced that of its counterparts where Covid restrictions were more pervasive. Yet, yesterday’s release of the US August CPI report showed a marked slowdown in inflation pressure, leading some to suggest that the transitory view of inflation has been validated.
One thing to watch, however, is wage rates. Job vacancies and labour shortages have pushed up wages in some sectors, especially in the hardest-hit low-wage hospitality and leisure sectors, including food services and accommodation. If price pressures become validated by enough wage inflation, we run the risk of inflation becoming embedded. Wage-price spiraling has not been a factor since the 1970s when labour unions were much stronger and labour had much more pricing power.
Financial markets appear to be sanguine about the prospect for inflation-induced rate hikes in the near term. Bond yields remain historically low. Next week, we will hear more from the Fed on this subject as the policy-making group releases its report on Wednesday, September 22. |