Inflation Shows Signs of Receding

Is inflation receding? The latest Consumer Price Index released last week suggests we are seeing a slowdown.

The Consumer Price Index (CPI) rose 0.3% in August, according to the U.S. Bureau of Labor Statistics. The core CPI, which excludes food and energy, increased just 0.1%—see Figure 1.

If we dig into the data, we find that most of the key categories tied to the reopening, which drove inflation higher earlier in the year, fell in August—see Table 1.

But the drop may also be influenced by the spike in Covid cases and the impact on travel.

Used car prices fell, but new cars are still being affected by chip shortages and thin supply—see Table 1.

But is it too early to declare victory over inflation? Problems in the global supply chain have yet to abate, and the spread of the Delta variant is compounding the problem.

While much of the broad-based service sector is showing price hikes that are in line with historical norm, price increases for consumer goods have accelerated dramatically, as illustrated in Figure 2.

Even if we remove the enormous increase in used car and truck prices, we’re still seeing significant gains, including a 0.7% rise in August. Note that during much of the last decade, prices were slowly falling.

Overall, the slowdown in the CPI is welcome—moderating for 2-straight months, but it’s too early to declare victory.

We are seeing signs of a reversal in categories tied to the reopening, used car prices dipped last month, and most services are rising at a pace that is in line with the long-term trend.

But consumer goods are rising at a fast pace—supply chain problems, with no signs of abating.