Pace of US inflation steadies at 13-year high in July

The rapid pace of US consumer price increases steadied at a 13-year high in July while month-on-month gains moderated slightly, as inflationary pressures persisted because of supply-chain constraints and soaring demand.

The consumer price index (CPI) published by the Bureau of Labor Statistics rose 5.4 per cent in July from a year ago, surpassing the 5.3 per cent expected by economists. That is in line with the 5.4 per cent increase reported in June, which was the largest such surge since 2008.

On a month-to-month basis, prices rose 0.5 per cent, compared with a 0.9 per cent gain in June.

Price pressures, even with volatile items such as food and energy stripped out, have eased little. The “core” measure rose a hefty 4.3 per cent in July relative to the year before, just shy of the 4.5 per cent increase seen in June.

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“I think that there’s still evidence that this [inflation] pressure is still there,” said Thomas Simons, an economist at Jefferies. “We’re not going to see prices go down, but at some point we are going to see the rate of increase come off.”

Whether the recent increase in consumer prices will turn into more persistent inflation is a point of debate. The US Federal Reserve has broadly taken the view that rising costs will abate over time, as pandemic-related shortages and supply-chain constraints ease. But Jay Powell, the central bank’s chair, recently acknowledged that inflation risks were tilted “to the upside” in the near term.

Recent data show that inflationary pressures have broadened beyond sectors most affected by the economic reopening – such as air fares and other travel-related expenses – raising concerns that inflation will be more than a “transitory” phenomenon.

Price gains moderated for some sectors more sensitive to pandemic disruptions.

Prices for used cars and trucks, which have increased 41.7 per cent on a year-on-year basis, rose just 0.2 per cent between June and July, a sharp deceleration from the 10.5 per cent and 7.3 per cent increases seen respectively in the previous two months. The Bureau of Labor Statistics said the decline was a “major factor” in the more subdued jump in the “core” inflation gauge.

Airfares also turned 0.1 per cent lower month on month, having shot 19 per cent higher from this time last year. The sharp rise in hotel expenses receded slightly, with costs up 6.8 per cent between June and July, following a 7.9 per cent rise in the previous period. That brings year-on-year gains to 24.1 per cent.

Housing costs

One worrying trend previously cited by economists is rising housing costs, which climbed further last month. Owners’ equivalent rent, which measures what homes would rent for, ticked up another 0.3 per cent month on month in July, building on similar gains seen in the previous two months. That brings the year-on-year increase to 2.4 per cent.

Alan Detmeister, an economist at UBS and a former Fed staffer, noted price gains in personal services and “food away from home” as signs of higher wages being passed on to consumers.

Personal services costs, including the price of haircuts, rose 1.2 per cent between June and July for a year-on-year increase of 3.1 per cent. Dining out costs increased 0.8 per cent month on month, and 4.6 per cent year on year.

According to Ellen Zentner, chief US economist at Morgan Stanley, ongoing price pressures are a positive development at this stage of the economic recovery. “With such a rapidly recovering economy, falling unemployment rate and all of the fiscal and monetary stimulus, you should be seeing underlying price pressures ticking up,” she said.

An increasing number of US central bankers have begun making the case that the central bank should soon consider scaling back its unprecedented monetary policy stimulus, which includes $120billion (€102 billion) of monthly asset purchases of agency mortgage-backed securities and treasuries.

The Fed has said it will maintain that pace until it sees “substantial further progress” on its goals of 2 per cent inflation on average and maximum employment.

Raphael Bostic, president of the Atlanta Fed and a voter on the federal open market committee, said this week that the Fed had achieved the first of these goals, a view supported by Tom Barkin of the Richmond Fed, Boston’s Eric Rosengren and James Bullard of St Louis, among others.

Fed governor Christopher Waller recently made the case for an announcement in September on “tapering”, while vice-chairman Richard Clarida backed a move later in the year.

US government bonds initially reversed earlier losses after the CPI report, sending yields on the 10-year note lower to 1.34 per cent before rising to 1.35 per cent. Two-year treasuries fell by a larger magnitude, with yields down roughly 0.01 percentage points to 0.23 per cent.

Additional reporting by Kate Duguid in New York – Copyright The Financial Times Limited 2021