When does transitory inflation become non-transitory? That is the question that Federal Reserve (Fed) Chair Jerome Powell is likely to be under increasing pressure to answer after the most recent inflation data surged past economists’ expectations.
The Bureau of Labor Statistics released the October Consumer Price Index (CPI) data yesterday, showing headline CPI climbed 0.9% month-over-month vs. estimates of 0.6%, while core CPI, which excludes volatile food and energy prices, rose 0.6% month-over-month vs. an estimate of 0.4%. The one-year increase in CPI, at 6.2%, is the highest since 1990, reflecting ongoing supply challenges in the face of strong demand, an increase in energy prices, and a rebound in some prices that had been dampened previously by the Delta variant surge.
“The latest CPI numbers surprised to the upside, creating more headaches for the Fed on how, and when, to respond.“ explained LPL Financial Chief Market Strategist Ryan Detrick “It’s looking more and more likely that ‘sticky’ rent inflation, increasing strength in the labor market, continuing supply chain disruptions, and increasing consumer demand could now push the Fed’s ‘transitory’ timeframe well into 2022.”
A big price increase in the housing component of CPI for the second month in a row, up almost 0.5% month-over-month, will be a particular concern for the Fed as this has the potential to be more ‘sticky’ than ‘transitory.’ As shown in the LPL Research Chart of the Day, rents, which make up the largest weight of the overall CPI calculation (41% of core CPI), surged to 15-year highs and could have further to run as the economy continues to open up and the labor market improves (initial jobless claims fell on Wednesday to a pandemic low of 267,000).
Other components of CPI were almost all higher month over month, with energy jumping 4.8%, bringing the yearly increase to 30%. Used car and truck prices, which had actually declined the prior two months, rose 2.5% month over month and had a sizable impact on the overall upside surprise despite having a low overall index weight of just over 3%. Airline fares fell 0.7% month-over-month and were one of the few detractors from the overall number.
While the CPI numbers continue to get a lot of attention and have the potential to be elevated for the short-to-intermediate term, we still believe that longer term inflation will remain reasonably well contained. Restarting the economy after a recession often creates supply disruptions that feed into inflation but the unique COVID-related economic disruptions have contributed even more heavily to a supply driven spike in prices. We continue to believe that as supply and demand are brought back into balance, price pressures should start to subside and that the long term forces limiting inflation, such as globalization and technology, will prove stronger than short-term inflationary pressures we are currently experiencing.
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