Inflation Runs Hot, Fed Unlikely to Make Any Changes

The first Consumer Price Index report since the Federal Reserve last met in June was released Tuesday, and the numbers show that inflation talk is not likely to end anytime soon. 

The CPI surged 5.4% in the year ending in June, the largest year-over-year gain since 2008. The index for used cars and trucks surged 10.5%, accounting for more than a third of the overall rise. Excluding food and fuel, inflation rose 4.5%, the largest increase since 1991. 

The news comes just before investor and economist eyes will turn to Fed Chairman Jerome Powell on Wednesday when he begins his two-day testimony to Congress on the state of monetary policy. Questions regarding inflation bond purchase tapering and housing are expected to dominate the discussion. 

The CPI numbers are not likely to influence Fed policy in the near future. Powell is expected to maintain his stance that inflation is transitory; higher prices for used cars, plane tickets, and hotel rooms are due to supply chain issues and a resurgence in demand brought on by reopening efforts. Given where the economy was during lockdown a year ago, significant year-over-year increases are to be expected, Powell has said. 

“When money supply goes up substantially from fiscal stimulus, it increases the demand that people have for many types of goods and services,” Lyn Alden, founder of Lyn Alden Investment Strategy, told Blockworks via email. “However, the supply of those goods and services did not increase, so naturally we are running into supply constraints of varying degrees of length.”

Higher prices will not last, Powell has insisted in recent months, but no one can say exactly when prices will start to lower. 

“We know inflation is running hot, the Fed doesn’t think it will be lasting, the market is reacting as if inflation is transitory, but what we don’t know is where inflation will settle,” said Tom Essaye, founder of the Sevens Report Research. “I’m of the belief that it won’t stay at 5%, but might settle eventually around 3% or so, which is double what we have been used to for a long time.” 

The stock market fell slightly following the news, but remained relatively stable, signaling that investors seem to be sticking with Powell’s transitory message, at least for now. Treasury yields dipped marginally as well.