McCreath: Look beyond the headline inflation numbers
Prices paid by U.S. consumers probably climbed in June at a solid pace as higher commodity and labor costs associated with the reopening contribute to inflationary pressures.
The consumer price index is projected to increase 0.5 per cent from the prior month, according to the median forecast in a Bloomberg survey of economists. Though distorted by so-called base effects resulting from the pandemic, the CPI is expected to rise 4.9 per cent from a year ago, near the largest annual gain since August 2008.
Prices in recent months have risen more significantly in categories related to travel and transportation, where demand is surging as pandemic restrictions are lifted. These increases help explain the view of Federal Reserve policy makers that inflation is transitory.
Economists will be parsing Tuesday’s report from the Labor Department for indications of more structural inflationary developments. The core CPI, which excludes food and energy, is seen rising 0.4 per cent from a month earlier and 4 per cent from June of last year.
“We will be watching for signs that higher inflation in COVID-centric categories such as airfares and lodging away are spreading to other categories such as rents,” economists at Deutsche Bank Securities Inc. said in a note on Monday. “As of yet, this has largely not happened, supporting the Fed’s narrative that such inflationary pressures are transitory.”
Higher prices are a symptom of supply bottlenecks, with reopening-sensitive categories and energy prices behind what Bloomberg Economics expects will be an above-consensus CPI print.
Yet the fever may be starting to break on a monthly basis, as Bloomberg economists Andrew Husby, Eliza Winger and Niraj Shah expect the core CPI to post its softest month-over-month gain since March.
Bloomberg Economics sees the CPI holding in the 4.5 per cent-5 per cent range through year-end, before steeper declines over the course of 2022. Base effects running in reverse mean sub-2 per cent CPI in the second half of 2022, followed by normalization into the 2-2.5 per cent range in 2023.
What Bloomberg Economics expects for June:
- A 0.6 per cent gain for both headline and core, both above consensus. The scramble for flights, cars and restaurant visits means cash-flush households chasing limited supply, and energy prices will be a mild positive.
- Our analysis of the May CPI results showed 52 per cent of the monthly gain was concentrated in six categories that will have little staying power long-term.
- Energy prices are following a slightly firmer track than we envisioned last month. Seasonally adjusted gasoline prices are set to rise roughly 3.4 per cent, enough to add a tenth to the month-over-month result. Gasoline prices unadjusted for seasonal effects rose about 3.0 per cent at a time they normally see a slight decline, a pattern that will also lift July fuel costs.
- The overall contribution of energy prices to the year-over-year rate of change will weaken for the first time since last November, slipping to 1.5 percentage points, down from 1.6 the prior month.