Team ‘Transitory’ Gets Small Win. But Caveats Abound

The most anticipated US inflation data since last month’s numbers showed price pressures abated more than expected in July. Or at least on the core gauge.

Core prices rose just 0.3% from the prior month, the government said Wednesday. That was less than the 0.4% economists expected (figure below), and just a third of the relatively torrid pace witnessed in April and June.

The headline gauge rose 0.5% last month, matching estimates.

Obviously, no one is “vindicated” by one month’s data. And even as markets dodged another scorching monthly core print, price pressures were evident across the economy.

Indexes for shelter, food, energy, and new vehicles all rose in July. The food index jumped 0.7%, with five of the major grocery store food group indexes rising. The shaded area in the figure (below) denotes the pandemic era.

If nothing else, it’s volatile.

The color on food at home painted a somewhat disconcerting picture if you’re the type of person who eats. The meats, poultry, fish, and eggs index rose a seventh month, for example. The index for cereals and bakery products rose the most since April of last year.

The lone major grocery store food group index to post a decline was the gauge for fruits and vegetables. Sadly, Americans aren’t big on fruits and vegetables, so that’s probably not much help. (As far as I know, there’s no index for Little Debbie snack cakes, the country’s basic foodstuff.)

The food away from home gauge increased 0.8%. That was the biggest monthly jump since 1981 (figure below) and capped a string of sharp monthly increases.

Clearly, pandemic dynamics are at work there. Indeed, I’d wager virtually every pandemic-related factor you can conjure, from higher input costs to labor market frictions to reopening dynamics, is playing havoc with that gauge. Remember to tip your (masked, vaccinated) server the same 20% you would have tipped when the bill was lower. Otherwise, they’re taking a pay cut.

The run of ridiculously high used vehicle prints finally ended. The used cars and trucks gauge rose just 0.2% MoM. As a reminder, the previous three months’ gains were 10.5%, 7.3% and 10%. “The deceleration in the index was a major factor in the smaller monthly increase in the index for all items less food and energy,” the BLS noted.

The YoY prints were essentially in line with estimates. Headline CPI posted a 5.4% increase (figure below). Core rose 4.3%.

Ultimately, we’re still in “write your own narrative” territory.

If you were concerned about inflation (or inclined to feign concern despite being rich enough that you actually don’t care except when you’re waxing hysteric on “Finance Twitter”), there was enough in July’s numbers to justify more hand-wringing.

If, on the other hand, you’re in the “transitory” camp, headline prints that matched estimates (and a slightly cooler-than-expected monthly read on core) could plausibly be cited as evidence that “peak inflation” occurred right around the time the US economy saw “peak growth.” (Imagine that.)

“This is the first monthly core read below expectations since February,” BMO’s Ian Lyngen said, calling the core figures “consistent with the notion inflation might have peaked and will ultimately prove transitory.”

“The annual rate of inflation has seemingly peaked, but the details show a broadening out of price pressures,” ING’s James Knightley remarked. “This indicates inflation is likely to be more persistent and pervasive than predicted by the Fed.”

Again, you can write your own script.