“Transitory” Inflation Cooling As “Sticky” Heats Up: Here Is The Heatmap From Today’s CPI Report
First the facts: core CPI rose 0.3% (0.33% unrounded) mom in July, coming in a touch below consensus at 0.4% mom and cooling off notably following the prior three months of average 0.8% spikes. Unfavorable base effects led to the % yoy rate dropping to 4.3% (4.27% unrounded) from 4.5% yoy in June. At the same time, headline CPI came in stronger at 0.5% (0.47% unrounded), boosted by a 1.6% pop in energy and 0.7% jump in food, which kept the % yoy unchanged at 5.4%.
According to BofA – and judging by the market’s delighted kneejerk response – this month revealed significant cooling in transitory inflation. First on the goods shortages theme: used car prices edged up 0.2% mom, even though new cars were much stronger at 1.7% mom. Some joked that this is an example of carbitrage, where “people buy new cars then flip them for profit as used cars”
People buy new cars then flip them for profit as used cars pic.twitter.com/aYY3PqUdzy
— shhh (@aboutNUMBERZ) August 11, 2021
That said, and as noted earlier, given the signal from wholesale used car prices as per the Mannheim Used Vehicle Index which began to turn lower in June, BofA expects negative readings in CPI used cars beginning next month in further relief to “transitory” inflation. Car/truck rental prices also dropped 4.6% mom following record gains in previous months, likely reflecting the start of a negative payback.
Meanwhile, price pressures were mixed across commodities: household furnishings/supplies edged up 0.1% mom, apparel was flat, and both medical commodities and other goods rose 0.2% mom. Meanwhile, recreation and education/communication commodities saw stronger readings of 0.5% and 0.8%, respectively.
Not everything “transitory” declined, however: reopening strength continued with lodging exploding 6.0% mom. However, airline fares edged down -0.1% mom leaving prices still 9.7% below pre-pandemic levels, perhaps in response to the recent media panic over the Delta variant. High frequency travel data have shown signs of plateauing in recent weeks, amid rising virus cases, which point to limited upside in airline fares in coming months. The broader transportation services sector plunged 1.1% mom, with a 2.8% dive in motor vehicle insurance a big drag. This largely reflects distorted seasonal factors after auto insurance credits were offered in spring 2020. Finally, seasonal factors support another big decline in August, though turn favorable in September which should lead to choppiness.
More problematic for the Fed, stickier sources of inflation remained solid.
Transitory items (used cars) normalizing; sticky non-transitory items (shelter inflation) ramping higher
— zerohedge (@zerohedge) August 11, 2021
Owner Equivalent Rent rose 0.29% mom in July and rent of primary residence rose 0.16% mom, albeit both a touch softer than in June. On an annual basis, shelter inflation has almost doubled since February, rising just shy of 3%, and Goldman expects this number to rise above 4% by 2022.
Medical care services picked up 0.3% mom, after averaging -0.1% over the prior 3 months. Improved professional services (+0.4%) and hospitals (+0.5%) offset continued weakness in health insurance (-0.6%).
Bottom line according to BofA: this report shows persistent inflation holding firm while transitory inflation ebbed and is likely to soften further going forward.
Immediately following the release, rates declined about 2 bps in the belly of the curve. The move was predominantly concentrated in inflation breakevens, likely reflecting the market pricing out to some degree the persistence of inflation overshoots. Five-year, five-year inflation breakevens declined only a bps or so, reflecting that today’s print does little to alter market measures of longer term inflation expectations, which are well anchored around the Fed’s target. The market pricing for timing of liftoff is relatively little changed and still for Q1 ’23.
Finally, here are the CPI heatmaps from the July report, first on a M/M basis…
… and here is the Y/Y data: