Tuesday’s CPI inflation numbers made a splash. The index surged 5.4% over the last year, surpassing expectations of 4.9%. Core inflation (which excludes the volatile gas and food categories) was up 4.5% year-over-year. Both were up 0.9% over last month, the biggest jump since 2008.
Here’s what analysts had to say about the report, and what it means going forward.
Good news and bad news
A big question surrounding inflation recently is whether it’s transitory or more likely to become more sustained. (“An episode of one-time price increases as the economy reopens is not likely to lead to persistent year-over-year inflation into the future,” Federal Reserve Chair Jerome Powell said in April.)
Bank of America's economics team pointed out that its "meter" recently showed historic temporary inflation.
“The bad news is that we are still not out of the woods, as core CPI and core PCE % year-over-year inflation are likely to remain elevated through year-end and into early 2022,” the bank’s Alexander Lin wrote in a note to clients. “The good news is that we are likely near the peak, at least for the next few months, as base effects are less favorable and shortage pressures rotate away from goods towards services.”
Furthermore, Lin continued, “There is even risk that transitory inflation turns into transitory disinflation.” If that happened, it could change the Fed’s position.
The supply and demand shocks have been unlike anything in recent memory, with the pandemic leading to shortages and demand shocks and then reopening causing a demand whiplash. The pendulum could swing the other way.
“A big question for goods and commodities inflation once the shortages and bottlenecks ease is whether there will be a leveling off in prices or a negative payback,” Lin wrote. “Thus, transitory disinflation could be substantial next year. This could create a new challenge for Fed communication and the hiking timeline.”
More broad-based than usual
Expectations going into the inflation numbers focused on energy costs, which has an outsize impact on the CPI number.
In a preview note, DataTrek’s Nicholas Colas pointed out that gas price inflation played a big role, making up 40% of June’s headline (total, unadjusted for gas and food) inflation.
Gas played a big role in inflation, but as Peter Essele, Head of Investment Management for Commonwealth Financial Network, wrote, inflation was felt across the board in many areas.
“It appears the June increase was more broad-based in nature with spillover into the core components of CPI, notably the services component. Shelter, for instance, which makes up roughly one-third of headline CPI is slowly marching higher, with June’s print showing an increase 2.6% year-over-year,” he wrote. “Used cars and trucks prices have increased 45% over the last year, which signals the largest move ever.”
Still no answers as to what’s permanent
Analysts were surprised by higher-than-expected total and core CPI metrics. But the numbers did little to clarify the biggest question: how permanent is any of this?
In a note to clients, TD Securities analysts said they thought the inflation increases in travel and used vehicles meant that the inflation was "largely" transitory. The big issue it saw was in rents reaccelerating up after a slowdown last year, which would point to something more permanent.
"As we illustrated once again in our latest US CPI Scanner, some private sector data tracking rents show much more strengthening than the CPI data in recent months, but the same data showed much more weakening in 2020,” analysts wrote.
Frustratingly for those who want more certainty, this could still be transitory, however.
“Some of the strengthening in rents could also be transitory to the extent the boost from reopening is at its peak now,” the note said.
[Read more: 3 types of inflation to worry about]
What this means for the Federal Reserve
One of the Federal Reserve’s key jobs is to control inflation, so of course, the data begs the question: What will the Fed do? Will it maintain its easy money policies meant to boost the economy through the pandemic?
Bank of America's Lin said the bank doesn't "believe this report changes much for the Fed.” The reason, echoed by TD Securities analysts, is because these price increases seem to be largely transitory, at least with the data we have now. And if this period is indeed almost over, transitory deflation or some opposite pendulum swing is something the Fed might not want to make worse.
Still, the latest data makes it harder for this “wait and see” to continue, ING’s James Knightley wrote.
“Yet another blowout inflation reading makes it increasingly difficult for the Fed to stick to its position that elevated inflation readings are merely ‘transitory,’” Knightley wrote. Costs for goods are going up and companies want someone else to pay — the customer — especially when demand is so hot.
“The case for a 2022 rate hike is strong,” he added.
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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.
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