The Consumer Price Index (CPI) Increased 0.5% in July

Implications:  Consumer prices rose at a rapid pace in the month of July, increasing 0.5% for the month with the 12-month increase remaining at 5.4%. It's strange that a 0.5% increase would denote a pullback from the readings we've seen in most recent months (the lowest monthly increase in the last four months) but may be a sign of the times we live in, where loose monetary policy has combined with high government spending, wide-spread supply chain problems, and excessively generous unemployment benefits to make it difficult for suppliers to match demand.  This month it was energy and food prices that led overall prices higher.  Energy prices increased 1.6% in July, on the back of higher costs for gasoline (+2.4%) and natural gas (+2.2%) and are up 23.8% in the last year.  Food prices increased 0.7% for the month, led by higher prices for food away from home  (+0.8%) and for meats, poultry, fish and eggs (+1.5%) which is the seventh monthly increase in a row for that category.  Stripping out these typically volatile sectors, and "core" prices rose 0.3% in July.  This month, it wasn't used cars that led core prices higher, but a combination of owners' equivalent rent (the rental value of owner-occupied homes), hotels and motels (+6.8%), as well as new vehicles (+1.7%).  Housing rents, both the imputed costs of owner-occupied homes plus actual rent payments from tenants, will be important to watch in the coming months as landlords regain the ability to part ways with tenants who aren't fully paying their rents.  The result should be faster increases in rental costs, which make up almost one-third of the overall CPI.  In turn, we expect this effect to help keep inflation persistently above the Federal Reserve's 2.0% target far beyond 2021.  Compared to a year ago, overall consumer prices are up 5.4% while core prices are up 4.3%.  The Federal Reserve claims these increases are "transitory", which is its way of saying there is no need to change monetary policy.  Some analysts will say there is no need to worry, that recent inflation is just a bounce back from lower prices during the COVID shutdown disaster, or come from areas where supply chains are squeezed.  Note that consumer prices are up at a 3.6% annual rate since February 2020 (pre-COVID), and this includes the drop in prices during the onset of COVID.  The M2 measure of the money supply has grown tremendously since February 2020, and while price increases are not evenly spread across all goods and services, to assume the overall pressure will subside just because there are a few items up rapidly would be a mistake.  Math wins, and today the math says inflation above the Fed's 2% target is likely to be with us for some time.

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Posted on Wednesday, August 11, 2021 @ 11:38 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.