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July C.P.I. Report: What to Expect

July C.P.I. Report: What to Expect
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July C.P.I. Report: What to Expect

July C.P.I. Report: What to Expect

Consumer prices most likely climbed at a rapid pace in July, another month of unusually rapid gains that could make Federal Reserve officials uncomfortable and a political liability for the Biden White House.

The Bureau of Labor Statistics is expected to release the Consumer Price Index at 8:30 a.m. on Wednesday. The measure of inflation likely rose 5.3% last month from a year earlier, and 0.5% from June, according to economists polled by Bloomberg.

This would represent a moderation in the pace of increase – the CPI rose 5.4% in June from the previous year and 0.9% in June from May – but still a rapid annual and monthly gain compared to what is typical.

Economists widely expected price gains to accelerate this year after the fall in 2020, but the size of the jump is surprising. The annual price gains will almost surely moderate over the coming months, as some quirk of the data that helped exaggerate them will fade away (more on that later).

Monthly earnings are also expected to continue to slow, as companies find ways to deal with short-term supply chain disruptions, which have driven used car prices up sharply and led to much of the pop-up. 2021.

But the key question for the Fed and the White House is how quickly this will happen. For the Fed, which is responsible for keeping price gains low and stable over time, temporary price jumps are tolerable. But if consumption and business models change, price gains could remain persistently high, which would be problematic. For the White House, rising costs have become a political headache as Republicans use them to pretend the Biden administration is mismanaging the economy.

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Here’s what to know when digging through Wednesday’s report.

  • The CPI is not the Fed’s target measure. The central bank is targeting inflation of 2% on average over time, and it sets that target using the personal consumption expenditure index, which has also increased this year but not as sharply as the measure that will be released on Wednesday. The CPI is more timely, and its data feeds into the Fed’s metric, making it heavily watched.

  • The increase is not everything on this basis. The so-called base effect played a big part in the gains earlier this year. The prices of airline tickets and restaurant meals fell last year when the economy stalled, so when today’s prices are compared to those numbers, the increase seems disproportionate.

    But the base effect is fading now, as prices took a turn after May 2020 with the economy reopening. It may vary a bit depending on how it’s calculated, but around 0.7 percentage point of the 5.3% price gain expected for July is likely attributed to the base effect. About 1 percentage point of the gain in previous months and 1.4% of May’s gain can be attributed to the base effect.

  • The increase relates to the pandemic. One thing The White House tends to emphasize is that much of the price increase is due to a few categories suffering from unusual quirks related to reopening. For example, used car prices have skyrocketed as a shortage of chips delayed the production of new cars. TD Securities analysts expect this trend to subside from this month’s report.

    The prices of airline tickets and hotels have also increased after falling during the recession, and are still returning to normal.

  • The jump was not that wide. While a few categories of goods and services are unleashed, it is not true that absolutely everything becomes more expensive. The Federal Reserve Bank of Dallas publishes what is called a “truncated average” inflation measure that rejects the categories with the largest increases or decreases each month. After eliminating outliers, this gauge shows that inflation is still running around 2%.

    People are watching to see if measures of large and persistent inflation categories are starting to increase in a more concerted fashion. For example, if housing costs take off as falling house prices trickle down to rents, this could keep inflation higher.

  • Rapid inflation will become a real problem if it lasts. “The question is more what the outlook for inflation will be over the next year, 2022, 2023,” Charles Evans, chairman of the Federal Reserve Bank of Chicago, said Tuesday on a call with reporters .

    Fed officials are monitoring wage increases and inflation expectations to see if the current surge in inflation from the reopening will persist. If the salary takes off steadily, employers may find that they have to charge more to cover their expenses. Likewise, if consumers and businesses begin to expect rapid price increases, they may be more willing to accept higher prices, triggering a self-fulfilling prophecy.

    For now, authorities do not expect this to happen.

    “My best guess is that this is something that will pass,” Fed Chairman Jerome H. Powell said at a recent press conference. “It’s really a shock to the economy that will pass.”

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Ben Casselman contributed reports.


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