Per yesterday’s data release, headline consumer price inflation for the US eased in August to 5.3% YOY—down slightly from 5.4% in July. The decline was driven by falling prices in certain goods and services categories, including used cars and trucks, car and truck rentals, airline fares, and lodging away from home, which saw surging demand earlier this year. However, energy and food inflation continue to rise, driven by rising oil and gas prices, labor shortages, and commodity-specific shortages.
Our View
Yesterday’s CPI report will ease many inflation concerns, as there remains little evidence of sustained price increases in any major spending category. Many “transitory” drivers of inflation related to economic reopening are already proving to be transitory. A surge in demand for travel and tourism services drove double-digit inflation in those categories from March to July, but the spread of the Delta variant and fading demand after a temporary boom are now driving down prices. Prices are rising for energy and food, but those increases are also likely to prove transitory. Energy inflation can be pinned mostly on rising oil prices, which are set to ease in late 2021 and 2022. Food inflation, which is most acute for meat (particularly beef) and food away from home, is primarily driven by virus-related food processing plant closures and post-lockdown food service labor shortages. Although the outlook for those factors is more uncertain, food inflation remains muted overall.
Business Implications
Firms operating in the US can anticipate easing consumer prices in late 2021 and 2022. However, prices for specific categories remain exceptionally volatile as the US economy continues to evolve and adjust to a variety of pandemic-related problems. Firms should therefore continue to monitor consumer price trends in categories of interest, for clues into how they should adjust their own pricing strategies in a fast-changing environment. Separately, firms outside the US can factor in a slightly weaker outlook for the US dollar, as this CPI report will likely push the Federal Reserve to extend the timeline for monetary tightening.
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