Monthly change in CPI: Reopening vs everything else
Source: Bloomberg Finance, L.P., as of August 12, 2021.
- Amid the ongoing transitory vs. enduring inflation debate, this week’s CPI release may have proven somewhat unsatisfying to both sides. It provided something for each side to cheer but also raised new questions for each camp.
- Ultimately, it probably highlights that the debate likely won’t be settled this year. Indeed, inflation data watching could remain a monthly ritual for investors for the foreseeable future.
- First, a look at the evidence supporting the transitory camp. Headline CPI moderated from 0.9% in June to 0.5% in July as prices declined across many of the reopening categories that spiked in previous months.1 Prices for used cars and trucks rose just 0.2% in July after jumping 10.5% a month earlier.1 Airfares also fell slightly following several months of sharp price increases.
- On the other side, however, annual inflation remained unchanged at 5.3%, its highest reading since July 2008, as prices rose across many of the other categories.1 Rent and owners’ equivalent rent specifically bear watching as these are two of the stickier pricing categories that account for almost a third of the CPI. Both figures remained unchanged in July and are well above their levels of just a few months ago as the cost of rents has begun to follow broader housing prices higher.
- Even if reopening prices continue to moderate, higher and more persistent inflation may remain part of the investment landscape for the remainder of this year. Against this backdrop, investors’ need for alternative income could remain at a premium as real returns across many traditional income investments may remain negative for some time.