The Independent Market Observer

Is Inflation Still Accelerating?

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Aug 11, 2021 4:19:31 PM

and tagged Commentary

Leave a comment

InflationOver the past couple of weeks, I have gotten a number of questions on inflation. It seems to be one of the top-of-mind issues. Given that, and the fact that the most recent inflation data hit this morning, it seems appropriate to give an update.

What Are the Monthly Numbers?

There are two data series here: the headline number (which includes everything) and the core number (which excludes food and energy). The reason for the difference is that the core number captures only prices, which are not affected by interest rates and monetary policy. Oil and gas, for example, go up and down on their own supply-and-demand dynamics. How much food you eat doesn’t depend on the Fed. So, from a monetary policy perspective, the core number is useful. But from a real-world perspective? The headline number, which captures the actual experience of a consumer, is a much more useful number, as it includes actual costs. So, both are useful, but for different reasons.

Let’s start with the headline number. It was up by 0.5 percent, which was both in line with expectations and down significantly from the prior month’s 0.9 percent. On an annual basis, headline inflation was 5.4 percent, slightly above expectations but the same as last month. For the core number, the monthly figure was 0.3 percent, below expectations and below the 0.9 percent of last month; the annual number was 4.3 percent, down from 4.5 percent last month.

So, What Did We Learn?

The simplest and perhaps most useful fact is that inflation has, at a minimum, paused. For both the headline and core figures, the monthly and annual numbers were stable or down from last month. Based on that data, inflation is certainly not on an unstoppable increase.

The next fact that’s worth a look is the gap between headline and core inflation. Headline inflation is up by significantly more than core inflation, suggesting much of the rise comes from energy and food. Looking at the data, that conclusion makes sense—and it gives us some guidance as to where inflation is coming from and where it might be going.

What’s Pulling the Numbers Higher?

Looking at the data, the biggest component of that headline excess over core inflation is from energy prices. It isn’t about food, as food inflation has actually come down this year. But when you look at the energy CPI, it is up about 25 percent, year-on-year, and that lines up with increases in oil prices. The headline inflation story is about the oil market, not about general price inflation, and oil prices drop as well as rise. The headline numbers are not indicating sustained inflation.

But the core numbers still might be, as they are indeed up, even if they show signs of peaking. But here as well there are a couple of components that are pulling the core numbers higher. Vehicles are a big one, with the price of new cars up by more than 5 percent and the price of used cars up by more than 40 percent. Here, too, you can make a good argument that inflation is about a couple of factors, rather than being more broadly based.

Even when we look more closely at other components, the outlook is better than the headlines would suggest. Service inflation, for example, is up—but let’s deconstruct that. Shelter inflation, for example, is still at less than 3 percent. Medical care service inflation is down to just over 1 percent. The excess inflation comes, once again, from transportation services, which are up by more than 10 percent but have recently ticked down.

So, the inflation story is more about isolated components, rather than general increases in prices, and even those components are showing signs of peaking. And this is even before we consider the one- and two-year differential, where we see most of the price increases this year are just catching up on the lack of price increases in 2020. As we dig into the numbers, inflation is above where it has been but is showing signs of rolling over and returning to more comfortable levels.

Could Inflation Rise?

Of course. Will it rise? Yes, but likely only a bit more quickly over time than it has over the past several years, once the economy normalizes again. Do we need to pay attention? Also yes, which is what we are doing right now. But do we need to make significant changes to what we are doing? No. Not yet.


Subscribe via Email

Crash-Test Investing
New call-to-action

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®