The U.S. Bureau of Labor Statistics released its July inflation report showing that the headline Consumer Price Index (CPI) rose 0.5% month-over-month and 5.4% year-over-year. The core CPI, which strips out the volatile food and energy components, rose 0.3% month-over-month, and 4.3% year-over-year. Given strong base effects from rolling off of weak data during the COVID-19 shutdowns, we find the month-over-month data more informative. Within that context, the more volatile components that are heavily tied to the economic reopening, as expected, have started to moderate. Price increases for used vehicles, airfare, and rental cars, for example, have slowed and have actually fallen in some categories.
We continue to see evidence that supply chain bottlenecks and a rapid demand rebound are pushing prices higher. Materials shortages and hiring difficulties will likely keep price pressures elevated in the near term, but we think these supply/demand mismatches will largely resolve themselves in coming months as supply, which has a longer ramp-up time than demand, recovers.
“This inflation release came in as-expected and so it doesn’t really change our view that we think these higher prices we’re seeing currently will subside over time,” explained LPL Financial Fixed Income Strategist Lawrence Gillum. “An economy operating more normally in 2022 should bring more normal inflation.”
As seen in the LPL Chart of the Day, owners’ equivalent rent of residences, a measure we’re watching closely to determine the “stickiness” of higher prices, increased 0.3% in July and rose 2.4% year-over-year, which was slightly higher than last month but still lower than in past years. Owners’ equivalent rent of residences, a measure of rents for non-rent-controlled residences in urban areas, is critical for future inflation prospects, as it is one of the largest components of CPI and is considered to be less volatile than other components. Movements observed in the series are, therefore, viewed as more structural in nature and thus have the potential to be “stickier.”
While one inflation release does not make a trend, it does show that some of the higher prices we were seeing over the past several months were likely transitory. Our base case remains that we think well above average consumer price increases will be temporary as the structural headwinds to higher prices (globalization, technology, instant price comparisons, etc.) remain in place. That certainly doesn’t mean we can’t continue to see higher prices in the near term, but we do think the pace of price gains slows over time.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. This Research material was prepared by LPL Financial, LLC. Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity. If your representative is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value
For Public Use – Tracking # 1-05178467