Supply Chain Issues, Labor Market Tightness Keep Inflation Readings Elevated

Key Takeaways:

• The minutes from the Federal Open Market Committee’s (FOMC) September 21-22 meeting showed officials are considering tapering asset purchases by $15 billion per month starting as early as mid-November. The taper would primarily be in response to the risk of more persistent inflation caused by disrupted supply chains, and some participants argued for a faster tapering pace as they didn’t want to feel compelled to raise interest rates while the Fed was still stimulating the economy via asset purchases.
• The Consumer Price Index (CPI) rose 0.4 percent in September, accelerating one-tenth from August but still below the recent June peak of 0.9 percent growth. On an annual basis, CPI increased 5.4 percent, one-tenth faster than in August. Core CPI increased 0.2 percent over the month and 4.0 percent on an annual basis. Prices for food at home jumped 1.2 percent, the fastest monthly growth rate since April 2020. Energy prices grew another 1.3 percent, slower than the 2.0 percent increase in August but still the fourth consecutive month of greater than one-percent price growth. Airline fares declined again, falling 6.4 percent, while other lodging away from home (includes hotels and motels) fell 0.6 percent. Owners’ equivalent rent grew 0.4 percent over the month, the fastest monthly rate since September 2016, and 2.9 percent from a year ago, the fastest rate since May 2020. The Producer Price Index (PPI) for final demand goods was up 1.3 percent, the largest increase since May, while prices for final demand services increased a more modest 0.2 percent. Core PPI nudged up 0.1 percent, the slowest growth rate since May 2020. On an annual basis, the PPI increased 8.6 percent while core PPI rose 6.0 percent. The Bureau of Labor Statistics (BLS) produces both of these reports.
• The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings declined by 659,000 in August to 10.4 million, which is still the second highest number on record, according to the BLS. Openings in leisure and hospitality fell 201,000 to 1.7 million. The number of hires slowed by 439,000 to 6.3 million. Total quits rose by 242,000 to 4.3 million, a record level, driven by a 164,000 increase in quits in the leisure and hospitality sector.
• Retail sales and food services increased 0.7 percent in September, according to the Census Bureau. Sales at food service and drinking places moved up 0.3 percent. Sales at motor vehicle and parts dealers increased 0.5 percent following four straight months of more than two-percent declines. Nonstore retailers, representing primarily online sales, rose 0.6 percent. Sales at gasoline stations were up 1.8 percent as prices at the pump increased. Core retail sales (excluding food services, autos, building supplies, and gas stations) rose 0.8 percent.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index declined 1.0 point in September to 99.1, the lowest level since March. A net negative 33 percent of respondents expect the economy to improve, the lowest net percentage since December 2012. The net number of firms planning to increase employment fell 6 points to 26, the lowest net percentage since April. A net positive 42 percent of firms report that they are raising worker compensation and a net positive 30 percent of firms say they plan to, an increase of one-point and four-points, respectively. Similarly, a net positive 46 percent of respondents say they plan to raise selling prices, up 2 points from August to set a new series record.

Forecast Impact:

Headline CPI was tempered somewhat by declining prices for hotels and airlines, which continued to be hit by low levels of business travel and continuing Delta variant concerns. We expect upcoming holiday travel will push up price growth in these industries in Q4. Q4 CPI is also likely to be impacted by rising energy costs, as prices for natural gas, oil, and coal have surged recently. Rising energy prices, as well as continuing supply chain bottlenecks, are also continuing to impact the PPI, as final demand goods prices increased rapidly again in September. Though we expect energy prices to stabilize and ultimately drag on inflation in mid-2022, we have upgraded our near-term inflation forecast due to near-term increases in energy costs, growing pessimism about how quickly supply chain issues can be resolved, and the transition of consumer spending away from goods and into services occurring more slowly than anticipated. Owners’ equivalent rent (OER) also accelerated in September, and we believe further growth is likely to persist through at least 2022, given that OER typically lags home price growth. Therefore, although we expect inflation to peak in 2021 Q4, we anticipate elevated inflation readings throughout 2022.

We do expect that some transitory inflationary pressures will begin to roll off, such as prices for many durable goods and energy. The modest 0.1 percent increase in core PPI, which is sometimes thought to lead CPI, supports this notion. Still, we believe wage and price pressures are likely to persist, as the number of job openings remain near the highest level on record and small businesses continue to report that they are raising both worker compensation and average selling prices. Further, the record number of quits indicates that workers are confident they can find better paying jobs as worker bargaining power is the highest it’s been in recent history.

Retail sales rose for the second straight month and moderately outpaced CPI gains, consistent with our expectation that real consumption will grow modestly through the end of the year. However, we believe the nominal increase in auto sales this month largely reflects higher auto prices and the fact that manufacturers are producing more expensive, higher margin cars due to the ongoing semiconductor shortage. Therefore, we expect subdued auto sales, as well as some continuing reluctance to return to normal levels of spending on services, to drag on consumption growth in 2022.

Nathaniel Drake
Economic and Strategic Research Group
October 15, 2021

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