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

on Aug11
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Consumer prices most likely climbed at a rapid clip in July, another month of unusually quick gains that could keep Federal Reserve officials uncomfortable and pose a political liability for the Biden White House.

The Bureau of Labor Statistics is set to release the Consumer Price Index at 8:30 a.m. on Wednesday. The inflation measure probably increased by 5.3 percent last month compared with a year earlier, and 0.5 percent from June, according to economists surveyed by Bloomberg.

It would represent a moderation in the pace of increase — the C.P.I. rose 5.4 percent in June from a year earlier, and 0.9 percent in June from May — but still a rapid yearly and monthly gain compared to what is typical.

Economists widely expected that price gains would pick up this year after slumping in 2020, but the extent of the jump has come as a surprise. Yearly price gains will almost surely moderate in the months ahead as a data quirk that’s been helping exaggerate them fades (more on that later).

Monthly gains are also expected to continue cooling off as businesses find ways to cope with short-term disruptions to supply chains, which have pushed used car prices sharply higher and led to a big part of the 2021 pop.

But the key question for the Fed, and the White House, is just how quickly that will happen. For the Fed, which is charged with keeping price gains low and steady over time, temporary price jumps are tolerable. But if consumer and business patterns change, price gains could stay persistently high, and that would be a problem. For the White House, climbing costs have become a political headache as Republicans use them to claim the Biden administration is mismanaging the economy.

Here’s what to know as you dig into Wednesday’s report.

  • The C.P.I. is not the Fed’s target measure. The central bank aims for 2 percent inflation on average over time, and it defines that goal using the Personal Consumption Expenditures index, which has also been up this year but not quite as sharply as the measure to be released on Wednesday. The C.P.I. is more timely and its data feeds into the Fed’s metric, though, which makes it very closely watched.

  • The increase is not all about that base. The so-called base effect played a big role in the gains earlier this year. Prices for airline tickets and restaurant meals dropped last year when the economy locked down, so when today’s prices are measured against those figures, the increase looks outsized.

    But the base effect is now fading, because prices turned a corner after May 2020 as the economy reopened. This can vary a bit depending on how its calculated, but roughly 0.7 percentage point of the expected 5.3 percent gain in prices for July is likely attributed to the base effect. About 1 percentage point of the prior months’ gain, and 1.4 percent of May’s gain, can be attributed to the base effect.

  • The increase is about the pandemic. One thing the White House tends to point out is that much of the increase in prices has come from a few categories that are suffering from some unusual reopening-related quirks. For instance, used car prices have shot up as a chip shortage has delayed production of new cars. Analysts at TD Securities expect that trend to calm down starting with this month’s report.

    Airfare and hotel prices have also climbed after slumping during the downturn, and are still getting back to normal.

  • The jump has not been all that broad. While a few categories of goods and services are going wild, it is not the case that absolutely everything is becoming more expensive. The Federal Reserve Bank of Dallas publishes what is called a “trimmed mean” inflation measure that tosses out categories with the biggest increases or decreases each month. After eliminating outliers, that gauge shows that inflation is still running at about 2 percent.

    People are watching to see whether measures of important, and persistent, inflation categories start to move up more concertedly. For instance, if housing-related costs take off as a home price crunch bleeds into rents, that could keep inflation higher.

  • Fast inflation will become a real problem if it lasts. “The question is more — what the inflation outlook is going to be into the next year, 2022, 2023,” Charles Evans, president of the Federal Reserve Bank of Chicago, said on a call with reporters on Tuesday.

    Fed officials are watching wage increases and inflation expectations for a signal of whether the current burst of reopening-driven inflation will linger. If pay takes off on a sustained basis, employers may find that they need to charge more to cover their expenses. Likewise, if consumers and businesses start to expect rapid price increases, they may be more willing to accept higher prices, setting off a self-fulfilling prophesy.

    For now, officials don’t expect that to happen.

    “My best estimate is that this is something that will pass,” Jerome H. Powell, the Fed chair, said in a recent news conference. “It’s really a shock to the economy that will pass through.”

Ben Casselman contributed reporting.

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