- The mercury fell slightly on consumer prices in July, as the month-on-month (m/m) increase was 0.5%, down from 0.9% in June. As a result, headline inflation was 5.4% year-on-year (y/y), matching June’s pace.
- Core prices (ex. food and energy) also lost some steam, posting their smallest increase in three months. The index rose 0.3% m/m after a 0.9% m/m gain in June. That drove year-on-year core inflation to 4.3% in July, down slightly from 4.5% in June.
- Food and energy prices bucked the broader cooling trend, with food prices up a hearty 0.7% m/m and energy up 1.6% m/m. Food costs are on the rise again, like they were early in the pandemic. Energy costs, on the other hand, which plummeted in the early months of the pandemic, are now up 23.8% versus those low levels of a year ago.
- Many of the travel-related categories that have surged in recent months lost some steam in July. Used vehicle prices were up a modest 0.2% m/m. Prices for car and truck rental and airline fares both fell. As a result, this collection of categories contributed far less to core inflation that it had in the March through June period.
- However, other categories are stepping in, albeit at a less scary pace. Shelter costs were up 0.4% m/m, accounting for over half of July’s core basket increase. Part of that are still healthy increases for lodging away from home (+6.0% m/m), as Americans start travelling again. Medical care costs rose 0.3% m/m, after falling in May and June. Recreation prices rose 0.6% m/m, picking up from June’s 0.2% m/m pace.
Key Implications
- As expected, many of the re-opening-related price spikes seen through the spring have started to cool. “Travel-related” inflation, which has been a big factor in driving 30-year highs in core inflation in recent months has started to cool.
- However, other key categories are showing that inflation pressures in an economy running at a 6%+ pace in real terms are not gone. Namely shelter, which carries a heavy weight in the CPI, show signs of heat. We expect it to keep inflation near or above 2%for some time. Therefore, once employment has made substantial progress the Federal Reserve is likely to take its foot off the monetary accelerator and start tapering asset purchases by year end
