• Expected annual PCE rate up, monthly results down.
• CPI at 13-year high in September, wages and oil higher in September.
• Logic of declining Federal Reserve bonds aided by the rise in PCE inflation.

Inflationary pressures in the US economy have not abated with the heat. Ongoing supply chain restrictions, labor shortages and increases in commodity prices are expected to make fall and winter as uncomfortable for consumers as summer.

The personal consumption expenditure price index (PCE) is expected to rise 0.3% in September and 4.7% over the year after increases of 0.4% and 4.3% in August. The core index is expected to rise 0.2% after gaining 0.3% in August and 3.7% annually after rising 3.6% in August.

PCE Price Index

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IPC and IPP

Gains in consumer prices which saw the annual CPI more than double in the six months from March have moderated somewhat.

CPI

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In September, the rate of 5.4% was no higher than in June and July, although it was up 0.1% from August. The 0.4% monthly increase, also 0.1% higher than in August, is still only half of the 0.8% average increase in the second quarter.

Base rates were also tempered from their monthly average of 0.8% in the second quarter, rising only 0.2% in September. Annual gains of 4% were unchanged last month, below 4.3% in July but above the 3.8% average in the second quarter.

Prices in the production process continue to rise, promising more consumer inflation as retailers pass these costs on to buyers.

The annual producer price index (PPI) hit 8.6% in September, down from 8.3% previously, the highest rate in 13 years. Core PPI jumped 6.8%, the highest on record. Headline PPI has climbed 506% since recording 1.7% in January. Core PPI is up 340% after starting the year at 2%.

IPP

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Raw materials and petroleum

Whatever time period a chart over the past 19 months, commodity prices have been tearing apart.

In September, the Bloomberg Commodity Index (BCOM) rose 4.9%. These gains continued in October with a further 3.9% increase. For the year, commodity prices rose 29% and since the April 2020 low, they have climbed 73.8%.

BCOM

Bloomberg / MarketWatch

West Texas Intermediate (WTI), the crude oil pricing standard for the Western Hemisphere, is an even more extreme example of price inflation. Since the opening on November 2, 2020, WTI has climbed 126%, since January 4, it is up 68%. In September, it is 10% higher. From the most recent August 20 low, WTI has climbed 31%.

WTI

Such increases in commodity prices have a huge impact on an industrial economy. Energy costs are the basis of every production process. When input price increases are as rampant as they have been this year, carry-over to consumer prices is inevitable. As parts produced increase, consumer costs will also increase.

Federal Reserve inflation expectations and the economy

The Federal Reserve’s hope that the price increases would be transient hinged on the assumption that the base effects of last year’s foreclosure would quickly fade and the impact of supply and labor disruptions would end. would reverse quickly.

This has not, at least so far, been proven.

Labor shortages, perhaps confusing to the Fed and many economists, continued. People have not returned to work in numbers equal to the pre-lockdown economy. This appears to be a particular problem in the United States, as the Canadian labor economy returned to full employment in September. The labor shortage reduced the output of factories and the resulting product shortage contributed to inflation.

The gains in commodity prices have also proven to be more sustainable than expected, with commodity shortages leading to a decline in capacity implementation.

The supply of oil has not kept up with the increase in demand. The tight supply was in part due to US policy, which made a normal resumption of production much more difficult.

By 2019, the U.S. shale industry had become the world’s largest back-up producer. This ability has been largely eliminated by Washington. American shale companies have in the past been willing and able to increase production in response to rising prices. For political reasons, this is not the case for OPEC and Russia, the other two producers having excess capacity.

The vulnerability of just-in-time manufacturing processes, which by design contain few raw materials or components, has been highlighted. As long as supply chains and delivery times are reliable, it is a standard of efficiency. But a supply link intended to deliver a constant but limited amount of goods, materials and components, cannot be easily expanded to meet the needs of a global replenishment. Even though parts and materials could be found, the increased tonnage of ships attempting to unload at US ports has created long and so far insurmountable delays.

Commodity inflation is an important ingredient in overall price hikes and is unlikely to dissipate much over the next six to twelve months.

Conclusion: inflation and the cone

The problem for the Fed’s transient inflation narrative is that the base effect changes that led to the price collapse during last year’s lockdown have passed. Prices are now determined by the kinds of pressures from wages, material costs, product scarcity, and growing consumer demand that are typical of economically driven inflation. Although these pressures may eventually ease, in the short and medium term, they seem destined to remain in charge of the price structure.

The Fed’s reluctance to acknowledge these changes will not affect its forward-looking cut announcement at the Nov. 3 meeting of the Federal Open Market Committee (FOMC). On the contrary, greater inflationary pressures on the PCE, even if they are officially taken into account by the spreading policy adopted last September, will encourage the Fed not to delay the reduction in bond purchases.

Is the Fed happy that inflation is soaring? Probably not. Do governors appreciate the added political logic? Not publicly.