Tracking US Inflation: Is the Worst Behind Us or Still to Come?

(27 September 2021) The latest data from the U.S. Bureau of Labor Statistics (BLS) shows that inflation in the U.S. is slowing down. In August, the consumer price index (CPI) decelerated to a 0.3% month-over-month increase compared to 0.7% to 0.9% monthly increases in April through June. 

The highest inflation has been concentrated among only a small number of categories of consumer goods and services. Prices for used cars and rental cars jumped amid supply chain disruptions and strong demand. Motor fuel prices increased, following world oil prices. And prices for plane tickets rose with the recovery of air traffic. The latest BLS data points to easing of these trends.

Nevertheless, the worst may still be ahead.

• The decrease in used car, car rental and airfare prices in August was mostly driven by the new COVID wave. Such near-real-time indicators as Apple's driving mobility index and the number of travelers screened at TSA checkpoints confirm an overall decrease in mobility through August and the first half of September. Once the current COVID surge subsides, price trends may reverse.
• While used car pricing received the most attention, prices for many other consumer categories are growing at a rate of more than 2% per year. A U.S. CPI heat map that highlights price trends for 26 major commodity and services categories shows only five categories had price gains less than 2% year-over-year. And for 50% of the categories, prices increased more than 4% year-over-year.
• Some indirect indicators also point to growing inflation pressure. According to the National Federation of Independent Business's small business actual price change indicator, which, when viewed with a six month time lag, can serve as a leading indicator predicting the CPI trend, the number of small businesses revising selling prices upwards has been growing since February 2021. The observed price hikes at small businesses may point to further inflation acceleration in the coming months.
• Though the U.S. Federal Reserve announced recently that it is going to moderate the pace of asset purchases soon, which could slow inflation, so far it continues to inject new money into the economy to boost demand. In addition to the 2020 $3.2 trillion stimulus package, the Federal Reserve purchased U.S. Treasury securities and mortgage-backed securities worth $1.1 trillion in Jan.–Sept. 2021. U.S. consumers are currently anticipating inflation levels closer to 4% in the mid-term, and vague statements from the Fed may not be enough to anchor inflation expectations.