Broader Inflation Pressures Begin to Show

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Price indices that exclude extreme changes point to ongoing inflation ahead of the Fed’s 2% target

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“These alternative indices are indicating that “inflation is not as extreme as the headline or traditional core shows right now, but it is rising,” said Sarah House, Wells Fargo director and senior economist.

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“All of these measures have moved from a sign of price stability to a sign of a sharp uptick in underlying inflation,” said Brent Meyer, an economist at the Federal Reserve Bank of Atlanta.

Some economists interpret this as inflation returning to a level consistent with a healthy economy, after being much lower before the pandemic. “There is now increasing price pressure, but not at a very alarming level – it is progress,” said Blarina Urusi, senior US economist at Barclays.

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Inflation, as measured by the Labor Department’s consumer-price index, was 5.3% in the 12 months to August, close to the highest in 12 years. Economists generally expect it to fall, but disagree by how much. They attribute temporary reasons for the recent surge in prices — such as increased post-vaccine spending, specific supply-chain problems and other production bottlenecks — that should fade as businesses increase output.

But an important question is whether prices will continue to rise after these temporary disruptions are over.

The Federal Reserve has argued that inflation will fall just above its 2% target by 2022. Still, Fed Chairman Jerome Powell, asked last week whether inflation is now broader and more structural than it was earlier this year, replied, “Yes, I think it is fair to say that.”

In August there were indications that cost growth related to supply disruptions was beginning to ease. The main consumer-price index, which excludes the often volatile categories of food and energy, rose only 0.1% since July, the smallest monthly increase since February. The prices of used vehicles fell sharply, as did hotel rates and airline fares, possibly due to the impact of the Delta variant on travel.

American economist Alex Lin of BofA Global Research said alternative inflation measures could help suggest where inflation is headed by reducing statistical noise or zeroing in on historical pricing patterns. For example, some brush off extreme price fluctuations such as the June increase in used vehicle prices, which accounted for more than a third of that month’s CPI growth.

Cleveland Fed’s 16% Trimmed-Mean CPI– which captures the most extreme price changes – and its average CPI, capturing the mid-most price changes, both grew at the same month-on-month rate in August as in July, suggesting That falling prices for airline fares, hotels and rental cars spurred the overall CPI to moderate a slowdown in inflation.

Inflation shown by these indexes is below the trend in the CPI and core CPI, but still above 2%, and—contrary to mainstream measures—continued to climb in August. Layoff-mean CPI rose 3.2% in August compared to the same month a year ago, up from 3% in July and well above the 2% average between 2012 and 2019.

Rising layoffs coupled with a more sluggish pickup in average CPI signals mean that many prices are experiencing above-average inflation, but most are not, said Robert W. Rich, director of the Cleveland Fed’s Center for Inflation Research.

The median suggests that “inflation will move back to a range in line with the Fed’s long-term target, while layoffs mean there is more upside risk,” he said. He cautioned that the unprecedented nature of pandemic shocks makes these movements unusually difficult to interpret.

One Index from the San Francisco Fed Which differentiates the CPI based on historical pricing patterns, also indicates that temporary price spikes due to supply and demand imbalances are fading.

The index regroups the Commerce Department’s core personal-consumption expense price index into a cyclical index, whose components are more sensitive to the strength of the economy as they move when the labor market is strong and all others move up in a cyclical range of prices. go. During the last 25 years of expansion, cyclical inflation was generally lower than cyclical inflation, but it was sharper from April to June. Now both are almost the same.

of the atlanta fed sticky-value cpi The underlying inflation is also indicating an uptrend. The index only includes items whose prices change relatively frequently, meaning they respond slowly to changes in economic conditions—for example, medical care and rent.

“By tracking this measure, we think we’re getting something that’s telling us … inflation for a year or two or three. And that measure is starting to rise,” said Mr. Meyer of the Alberta Fed. . Sticky-price CPI in August rose 2.6% from a year earlier, slightly faster than July, and close to the 2.8% rate it had just before the pandemic.

Mr Mayer said a significant increase in price pressures indicated by this and other indices is a potential concern.

write to Gwyn Guilford at [email protected]

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