The Fed’s “transitory” inflation thesis was put to the test once again in September as August data continued to flow in pointing to measurably higher prices across the product and service spectrum.  While shying away from setting a precise time horizon for softening prices, Fed Chair Powell has repeatedly suggested that price increases should soon begin abating.  A lot rests on when exactly that time is, as many price moves appear to be stickier than once thought.

Consumer prices rose +0.3% MoM and +5.3% YoY in August, while at the wholesale level, PPI surged +0.7% MoM and +8.3% YoY.  The Fed’s favored inflation measure, the PCE Deflator rose +0.4% MoM and +4.3% YoY in August, well ahead of their target range of plus or minus +2.0%.  Perhaps tellingly, Personal Income rose just +0.2% during the period while Personal Spending jumped +0.8% – a case of too many dollars chasing still too few goods.

Perhaps nowhere has the jump in prices been more evident (or painful to first-time home buyers) than in the housing market.  For the year ending July 31st, the S&P CoreLogic CS 20 City home price index rose +19.95%, following a +1.55% jump on the month alone.  Housing Starts in August rose +3.9% while Pending Home Sales leapt +8.1%.  There remains a fundamental supply and demand mismatch in the housing market that is not easily or rapidly fixable.  Even with the recent move higher in mortgage rates, demand should remain strong over the foreseeable future. As for the stickiness of recent price increases, the labor market will be a key barometer.  As the Unemployment Rate for August dropped to 5.2%, Average Hourly Earnings jumped by +0.6% MoM and are now up +4.3% YoY.  $15 per hour has widely been adopted as a base level wage for low-skilled and seasonal labor, including fast-food restaurants and much of the travel and leisure space.  Wage increases are notoriously tricky to roll back once in place.

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