Headline CPI Rises Again, Core Slightly Restrained

CPI reported slightly higher than expected in September with headline gains of 0.4% and core gains of 0.2%. This is despite the fact that supply chain disruptions continue to get worse. The September gains were rounded down from 0.243% and 0.412%, respectively. On a three-digit basis, the August core gain was the lowest since January. The headline y/y CPI metric rose to 5.4%, from 5.3% in August, 5.4% in both June and July, and 5.0% in May. It was the sixth biggest gain since 2008. 

The August decline in core CPI y/y to 4.0% was sustained by 4.3% in July and 4.5% in June, respectively, and 3.8% in April. These are the five largest gains from 1991 and 1992, respectively. After a three-month climb to June, airfare and used vehicle prices both fell in September. A mixed price swing pattern was observed that saw both a significant increase in new car prices and a large drop in apparel prices. After falling by 1.5% in August, used car prices dropped by 0.7% in September.

This was after huge increases in the previous three months, which included 10.5%, 7.3%, May, and 10.0%. After solid gains of 1.2%, 1.7%, 2.0% in June, 1.6% May, and 0.5% April, new car prices rose 1.3%. This was despite continued semiconductor shortages. After a decline of -9.1% and -0.1% respectively in August and July, airfare prices dropped -6.4%.

However, there were significant gains of 2.7%, 7.0%, and 10.2% for April. After a 0.4% August increase, apparel prices dropped by 1.1%, following a flat July reading and gains of 0.7%, 1.2%, and 0.3% respectively in April and June. After May and April’s restraint, the CPI rose due to higher energy prices in September.

The headline energy prices increased 1.3% in September, 2.0% in August, 1.6% July, and 1.5% June. Prices of gasoline rose 1.2% in September, 2.8% August, 2.4% July and 2.5% June. After gains of 0.4%, 0.7%, 0.8%, June, and 0.4% respectively in April and May, food prices rose by 0.9%. After four consecutive 0.3% increases and 0.2% gains in March and April, owners’ equivalent rent increased by 0.4%. After 0.3% gains in August, July, and 0.2% gains in March, prices for medical care services fell 0.1%. This was after a flat June figure and a -0.1% May decline. It also follows a flat April figure and 0.1% rise in March. After gains of 0.1%, 0.5%, and 0.6% in August, tobacco prices increased by 0.7%.

These prices haven’t fallen since May 2020. CPI headline gains continue to trend higher despite the sharp decline in Q2 2020. The 6-month average price gain for the headline is 0.580%, while the core gains are 0.534% and 0.438% respectively. The huge trade price and PPI gains have pushed consumer prices up by a significant 2021 increase, despite capacity constraints and “base effect” limitations.

Despite worsening supply chain problems, the long-awaited moderation of gains over recent months has been encouraging. This could help to sustain firm inflation index gains in Q4. We expect December’s y/y gains to be elevated at 5.7% headline and 4.4% core. We are yet to determine if the big price increases in 2021 will increase inflation expectations for 2022. This will likely decide whether or not the 2021 inflation rise is “transitory”.

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