For much of 2021 the debate has continued between those that view U.S. inflation as transitory, and those seeing longer-term supply issues. We are now at the point where inflation should continue to moderate if the transitory view is correct. The Fed sees 4% inflation this year, but closer to 2% next year. Tomorrow’s CPI numbers will be an important test of whether that view will play out.
June 2021 might have marked the peak of month-on-month inflation at 0.9% with July at 0.5% and August at 0.3% suggesting inflation rising at a slower monthly rate and a potential downward trend. However, just two months of inflation data can be noisy and even misleading. September’s inflation number will be significant for policy makers and for markets.
Should inflation remain at close to the 0.3% month-on-month rate that we saw in August, the transitory inflation camp may start to take a victory lap. Yes, inflation, which is typically measured on an annual basis, will remain high in 2022 until the price spikes of 2021 are fully worked through the annualized trend. Still, the direction of inflation in returning to lower levels will be somewhat clearer.
Backing Away From The Transitory Camp
However, the Fed is actually backing away from the transitory view somewhat. Even as most recent economic data is tending in their direction.
Fed Chair Powell said in recent testimony that he is “frustrated” that supply-chain bottlenecks have not improved. Also, another Fed policy-maker Raphael Bostic worried recently that inflation may “grind on” for longer than we would like.
So as the primary supporters of the transitory inflation viewpoint, the Fed may now be moderating their position as some of the drivers or recent inflation have not disappeared as many hoped they might.
So September’s CPI data, which is released tomorrow, will be important. We know supply-chain issues haven’t gone away, but in recent months inflation has eased from high levels. Policy makers have tempered their optimism on falling inflation in recent weeks.
Should inflation remain around 0.3% month-on-month as we saw in August, then policy makers and markets may be reassured. However, should inflation jump in the September data, then the debate between transitory and more structural inflation could well return to center stage.
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