Inflation Expected to Ease in August Despite Higher Oil Prices

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The latest inflation report from the Bureau of Labor Statistics (BLS) will be released on Wednesday, and it is expected to show a slight moderation in consumer price growth in August. However, some factors such as rising oil prices and supply chain disruptions could keep inflation elevated in the near term.

Inflation Moderates in August

According to a Reuters poll of economists, the consumer price index (CPI) is expected to rise by 0.4% in August on a month-on-month basis, compared to 0.5% in July. On a year-on-year basis, the CPI is expected to increase by 5.3%, slightly lower than 5.4% in July.

The core CPI, which excludes food and energy prices, is expected to rise by 0.3% month-on-month and 4.2% year-on-year, compared to 0.3% and 4.3% respectively in July.

The moderation in inflation is partly due to the base effects, as the low inflation readings from last year drop out of the calculation. It is also partly due to the easing of some pandemic-related price pressures, such as those for used cars, airfares, and hotel rooms.

Oil Prices and Supply Chain Issues Remain a Concern

However, some factors could keep inflation elevated in the near term. One of them is the rising oil prices, which have increased by about 40% this year due to the recovery in global demand and the supply constraints from OPEC+ and US shale producers.

According to the Energy Information Administration (EIA), the average retail gasoline price in the US was $3.17 per gallon as of September 6, up from $2.99 per gallon a month ago and $2.22 per gallon a year ago.

Inflation Expected to Ease

Another factor is the persistent supply chain disruptions, which have caused shortages and delays for many goods, especially those imported from Asia. The global semiconductor chip shortage has affected the production of automobiles, electronics, and appliances, leading to higher prices and lower inventories.

The Delta variant of the coronavirus has also added to the uncertainty and volatility in the global economy, posing a downside risk to demand and a potential threat to supply.

Implications for Monetary Policy

The Federal Reserve has been closely monitoring the inflation situation, as it prepares to taper its monthly asset purchases later this year. The Fed has maintained that the current inflation surge is largely transitory and will fade as the economy returns to normal.

However, some Fed officials have expressed concerns that inflation could prove more persistent than expected, and have called for an earlier start of tapering and rate hikes.

The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index, rose by 4.2% year-on-year in July, well above the Fed’s 2% target. The core PCE price index, which excludes food and energy prices, rose by 3.6% year-on-year, the highest since 1991.

The Fed will hold its next policy meeting on September 21-22, where it is expected to provide more clarity on its tapering plans and its outlook for inflation and interest rates.

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