Snapshot

Is US inflation peaking?


US headline CPI rose 0.5% month-on-month (m/m) in July after gaining 0.9% in June. After several months of upside surprises the increase was in line with consensus expectations. The annual inflation rate remained stable at a 13-year high of 5.4% year-on-year (y/y).

Core inflation came in below expectations, gaining 0.3% m/m in July after rising 0.9% in June. This was its smallest monthly increase in four months and resulted in the y/y rate rising 4.3%, down from 4.5% in June.

Finally, price pressures in some of the reopening sectors have started to weaken. In particular, prices for transportation services fell 1.1% m/m, while prices for used cars increased at a smaller pace. Further moderation in prices for used cars is likely, as suggested by weaker auction car prices (Chart 1).

Transportation services and used car prices are part of the acyclical indicator of core inflation, as these prices tend to respond to industry-specific factors, rather than to the strength of the business cycle.

As highlighted in the second chart below, the acyclical index has finally started to decelerate in July, coming in at 6.5% y/y, down from 7.4% in June. However, the cyclical indicator, which includes more persistent sources of inflation like rents, has continued to trend higher, ticking up to 2.7% y/y in July from 2.4% in the previous month.

Chart 1: Prices for used cars set to weaken further

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Chart 2: Cyclical versus acyclical core inflation

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This highlights a key difference between this and previous cycles as shelter prices normally continue to ease during the recovery. This time the lags between activity and inflation seem to be much shorter, a development which probably reflects the rapid pace of the upswing in the US which is creating bottlenecks in product and labour markets.

While the acyclical indicator is set to continue its moderation in the coming months, it is uncertain how large and transitory the increase in rents will be. Shelter prices, which account for more than 30% of US inflation, are rising at a time where there appears to be spare capacity in the US economy with the unemployment rate still far from its natural rate.

Whether inflation proves to be temporary or permanent will very much depend on if and when we see participation rates in the economy improve. If the number of available workers in the economy does increase, this should contain wage pressure and inflation.