Inflation's Clear Trendline

Even excluding energy, price increases are most likely headed for a cyclical high in August, and maybe even higher in September

The consumer price index (CPI) jumped 0.5% in July, though the core edged up only 0.1%. The July gains follow�readings of flat and 0.1%, respectively, in June. On a year-over-year basis, the CPI accelerated to a 3.2% pace (from 2.5% in June), while the core was still friendly at 2.1% (from 2%). Energy prices rebounded 3.8% after falling a cumulative 2.5% in May and June. Gas prices also jumped 6.1%. But vehicle prices fell 0.3%.

The year-over-year inflation figures for CPI were a bit stronger than we at Action Economics expected, and the outlook over the coming months is bleak given the uptrend in oil prices. The year-over-year core gain rose to 2.1% in July, and a further rise to 2.3% for this measure is likely in August. And perhaps more significant, the headline year-over-year inflation rate, 3.2% in July, will likely set new cyclical highs of 3.6% in August. The risk is that the rate reaches 3.7% by September if prices remain firm.

Though economists like to "ex-out" the energy price figures, this component has clearly revealed a fairly monotonic uptrend through this expansion, and the sustained high levels of headline year-over-year inflation through this cycle certainly raises the the inflation outlook temperature. The mix is evident in the trade price data, where lean overall prices in response to a strong dollar have been swamped by big gains in oil import prices, leaving a steady upward trend in import prices overall.

OSCILLATING FEARS. Our producer price index (PPI) estimate for July has been boosted to a 0.6% increase overall but still with a flat "core" figure, leaving a similar pattern of strong overall price gains led by oil.

In total, the accumulation of "pipeline" inflation pressures through the first quarter corresponded to a string of troubling inflation reports at that time. This anticipated pop in inflation was then followed by a seasonal slowing in price pressures in the second quarter, as well as a moderation in energy in the second quarter that may or may not be part of the seasonal swings.

Now, the economy is facing renewed upward momentum on prices led by soaring oil. Inflation fears are continuing to oscillate between overshooting and undershooting what might better be seen as a sustained cyclical uptrend in inflation to levels that will probably prove higher in this cycle than in the last cycle.

Englund is chief economist for Action Economics

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