Is Inflation Still Transitory?
While higher inflation and a recent slowdown in economic growth have stoked stagflation fears amongst investors, we continue to expect inflation to tame in the coming months.
The September CPI report showed consumer prices have resumed a faster pace of growth as more sustainable sources of inflation are now picking up. Headline CPI topped expectations at +0.4% m/m and +5.4% y/y before seasonal adjustment, matching the largest annual gain since 2008. Excluding food and energy components, Core CPI rose 0.2% m/m and 4.0% y/y, in line with expectations and unchanged from August. With inflation still elevated by historical standards, this morning’s report suggests we may not be past the inflation heatwave just yet.
Inflation was primarily driven by increases in the prices of food and shelter, together contributing to more than half of the monthly headline CPI increase. The index for food at home increased by 1.2% and energy increased by 1.3%, led by higher oil and gas prices. New auto prices continued to rise rapidly as the semiconductor shortage persists. Meanwhile, hotel rates and airfares cooled, reflecting the impact of the delta variant on travel, and the prices of used cars and trucks continued their descent from record highs.
Perhaps most notably, inflation is now being driven by less “transitory” factors. Higher home prices are beginning to filter into CPI data; rent of primary residence jumped 0.5%, the most since 2001, and owners’ equivalent rent rose by 0.4% m/m and 2.9% y/y. Further increases in shelter costs, which make up a third of the overall index, could provide a more durable tailwind to inflation in the coming months.
With this morning’s figures, we estimate that the headline and core PCE deflators will rise 0.3% and 0.2% in September, respectively. This would result in headline PCE inflation of 4.5% y/y and core PCE inflation of 3.7% y/y.
This report will likely reaffirm the Fed’s plans to begin tapering in the coming months and may raise the likelihood of a rate hike in 2022, especially as supply chain pressures show little signs of abating. Sustainably higher inflation can pose problems for the nascent economic recovery, eroding Americans’ buying power and posing a challenge for corporate profits. However, while higher inflation and a recent slowdown in economic growth have stoked stagflation fears amongst investors, we continue to expect inflation to tame in the coming months, and together with still robust progress on the labor market recovery, the economy looks far better than its state during the 1970s stagflation.
Owner's equivalent rent of primary residence
month-over-month % change, seasonally adjusted
Source: Bureau of Labor Statistics, J.P. Morgan Asset Management. Data are as of October 14, 2021.