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August Consumer Prices Rise by Less Than Expected, Weakening Dollar

by Karl Schamotta | September 14, 2021

Inflationary pressures began to subside in the United States last month, helping to vindicate central bankers and market participants who have long expected price gains to slow as the pandemic’s effects fade. The Bureau of Labor Statistics reported a 0.3 percent seasonally-adjusted increase in the consumer price index in August from July, slower than the 0.5 percent monthly increase in the prior month, and considerably weaker than June’s 0.9 percent pace. Economists had projected a 0.4 percent gain.

Less-volatile prices rose even more slowly: The core inflation index, which excludes food and energy costs, climbed 0.1 percent in the month, compared with 0.3 percent in July. This marked the smallest increase since February, and was well below market expectations closer to the 0.4 percent mark.

The dollar dropped sharply and mid-curve Treasury yields fell as traders lowered expectations for interest rate increases around the three-to-five year horizon. 

Categories began to normalize: Costs for shelter, recreation, medical care and new vehicles continued to edge up. Airline fares and used vehicle prices declined by -9.1 percent and -1.5 percent, respectively.

Behind today’s numbers, inflation is coming from the demand side: The biggest fiscal stimulus program in human history, begun under the Trump administration and continued by Biden, has pushed awe-inspiring amounts of money into the US economy.  This, combined with a post-pandemic shift in consumer preferences, has driven an outsized recovery in appetites for tangible goods, personal transportation, and housing.

And the supply side: Bottlenecks – caused by product shortages, virus-related shutdowns, transportation issues, and a series of one-off factors – continue to plague global supply chains, raising input costs. Some of these effects could last well into next year.

Expectations are rising: According to the New York Federal Reserve’s August Survey of Consumer Expectations, released yesterday, respondents see inflation hitting 5.2 percent by this time next year, up from 4.9 percent in July. Three years out, prices are expected to rise 4 percent, up from July’s 3.7 percent.

But central bankers remain unworried: In late August, Fed Chairman Jerome Powell noted that long-term inflation expectations remained well anchored, with limited evidence of a “wage-price spiral” evolving in labour markets. He observed that prices increases have largely been confined to a “relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy,” with little reason to believe that global disinflationary forces have “suddenly reversed or abated”.

Markets agree: Going into today’s release, five- and ten-year inflation breakevens were trading near 2.5 percent, and most major commodity prices had dropped from early-year highs – suggesting that investors expect price pressures to moderate as the global economy recovers.

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