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August Inflation Shows Some Moderation, But Housing Costs Are A Puzzle

Topline inflation didn’t change too much for the report just released for August. Topline 12-month inflation is running at 5.3%. That’s fractionally lower than last month. However, the month-to-month change is more encouraging. August showed the lowest monthly price increase at 0.3% month-on-month since January 2021.

Therefore, maybe the view of the transitory inflation camp has some merit, even if current inflation takes some time to fully moderate. That said, even 0.3% monthly inflation as we saw in August, still translates to a 3.6% annual inflation rate, so still significantly ahead of the Fed’s 2% goal for inflation.

The Details

Many prices are declining after surges. Airline costs actually fell in August after grabbing headlines for rising sharply earlier in the year. The same is true of used cars. Food costs, which are a fairly large part of the CPI index rose, but at a slower rate than past months. Energy costs, which are volatile, have continued to rise.

Puzzling Housing Costs

As Duke economist Campbell Harvey has pointed out there appears to be a disconnect between the inflation data and the real world on the cost of housing. Housing is a big portion of expenditure and hence makes up about a third the CPI index. Before you read further, take a second to think about your own experience with house prices and rental costs over the past year or so.

Now, here’s what the data suggests. While housing and rental costs are rising 10% to 20% according to major indices, the CPI index for shelter has risen just 2.8% year-on-year as of August 2021. That’s puzzling and perhaps rising housing costs will take more time to fully appear in CPI figures. The disconnect between third-party reports and CPI data on housing prices and rental costs is remarkably stark.

What’s Next

Perhaps more important for markets is the Fed’s reaction to inflation data, rather than the data itself. The Fed will meet next week to update policy. There is evidence to support the view that inflation may be transitory. However, the term transitory is vague and where inflation ultimately ends up remains an open question, even if it’s lower than the peaks of summer 2021. August data suggest inflation could remain high into 2022, but perhaps still not enough for the Fed to prioritize it over other policy goals. We’ll learn more from the Fed on that next week.

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