The White House and the Federal Reserve have been watching inflation data nervously, hoping that the rapid rise in prices will soon disappear, but increasingly admit that cooling takes longer than they expected earlier this year.
The key consumer price readings, which will be released on Wednesday, are unlikely to calm them down.
According to a Bloomberg survey of economists, the consumer price index is likely to rise 5.3 percent in September over the previous year. From August to September, the index is likely to rise 0.3 percent.
Although monthly growth has slowed down from a breakneck pace earlier this year – up 0.9 percent this summer – they still remain abnormally fast. And price pressures are not subsiding as quickly as politicians hoped.
Inflation jumped early in 2021, when prices for air tickets, food in restaurants and clothing will recover from a sharp decline due to the economic lockdown in the midst of the pandemic. This was expected. But recently, prices have continued to rise as, due to a lack of supply, businesses cannot keep up with rapidly growing demand. Factory closures, clogged delivery routes and labor shortages in ports and along freight transport lines have combined to make it difficult to manufacture and transport goods.
The shards are showing no clear signs of easing, and while Fed officials still believe inflation will ease, they are increasingly concerned that supply disruptions could last long enough to prompt consumers and businesses to anticipate higher prices. If people believe their lifestyle will cost more, they may demand higher compensation – and as employers raise wages, they may charge more for their goods to cover costs, triggering an upward spiral.
Companies are already raising wages to lure back employees who left the job market during the pandemic and have not yet returned, and landlords are rapidly raising rents. Both factors could contribute to inflation in the months ahead – and unlike the pandemic-related fads that must eventually resolve on their own, higher wages and higher housing costs could become a more permanent source of price pressures.
Fed officials have made it clear that they will use central bank policy to control inflation if it proves sustainable, but they would prefer to keep borrowing costs low until the labor market fully recovers. These potentially conflicting goals could set the stage for a hectic 2022.
Wall Street is keeping a close eye on every new inflation data release because higher Fed rates could affect growth and stock prices.
And the White House is under pressure to fix whatever it can. Later Wednesday, President Biden is expected to address the supply chain issues that affect his approval ratings as they push prices higher.
The Labor Department is to publish the CPI at 8:30 am in Washington DC. Here’s what to watch:
Headline inflation is expected to rise 5.3 percent from the previous year, in line with the annual CPI increase in August. Core inflation, excluding food and fuel prices, is expected to rise by 4 percent.
Policymakers are likely to pay special attention to the data by month, as much of the annual data is due to the increase in the number of cars and other categories that occurred this summer. While monthly growth is slowing, a 0.3 percent gain would translate into about 3.6 percent gain if it had persisted throughout the year. Better, but still fast.
Also important is the “owner’s equivalent rent”, a rent-linked price indicator that is about 24 percent of the total index. It moves upward and, if it accelerates further, could become a source of stickier inflation.
Prices for new cars and used cars and trucks can play a big role again. Both have contributed greatly to inflation this summer. Used car prices have begun to decline, but real-time data shows that the situation is changing.