Not to tempt fate or anything, but it looks like inflation is starting to mellow out a bit. Last month, the cost of living rose at its slowest pace since January, the Department of Labor reported on Tuesday, in part thanks to the falling cost of used cars and travel, spending categories that until recently had been driving the sudden burst in consumer prices, which led half the financial press and the entire Republican Party to start yacking about how we were reliving the 1970s. Turns out we’re not—at least if this last batch of data is a hint of things to come.
The numbers: Headline inflation increased only 0.3 percent during August, below what economists had projected and just one third of the blistering pace it set in June. If you take food and energy prices out of the picture, the deceleration has been even more rapid; so-called core inflation inched up by 0.1 percent in August, down from 0.9 percent two months ago.
Year over year, the Consumer Price Index is still up 5.3 percent—which is a lot. Americans haven’t seen anything like that sort of jump in decades. But directionally speaking, inflation seems to be chilling down rather than heating up.
What changed? Mostly, some of the sectors that pushed inflation up during the spring and early summer up are now pushing it down a bit. Used car prices dropped ever-so-slightly back toward earth last month after their unprecedented runup earlier this year. Airline and hotel prices, which had been recovering from the beating they took in 2020, also retreated somewhat, as the Delta wave put another damper on tourism. That isn’t really good news for the economy, per se—it’d be better if people were out spending—but it’s taking a little pressure off of prices. It should also somewhat deflate the argument that the government is spending more than the country can handle right now, which has lately been Sen. Joe Manchin’s flimsy rationale for trying to cut down the size of the Democrats’ big reconciliation bill.
If you exclude the car market and industries affected by the pandemic entirely, not a lot changed last month. In fact, inflation in the remaining sectors sped up a bit, as Harvard Kennedy School economist Jason Furman notes. Over the last four months, they’ve added an average of 2.8 percentage points to core inflation, which is a little higher than monetary policy makers would like, but not the kind of thing anybody should be furiously smashing the panic button over. If you ignore the violent swings of a few major industries, inflation is consistently a bit warm, but not burning up.
It’s a little bit premature to write off the threat of inflation going forward entirely. Prices could continue to rise a bit faster than the Fed or Americans in general would like if global supply chains stay tangled, or if housing costs, which have stayed relatively tame overall, begin rising quicker (the home-buying market has been bonkers for months, but it still hasn’t been matched by rents). It’s unclear how much more used car prices will fall if the new car market, which is still suffering a shortage of inventory, doesn’t get back to normal soon. But the big question about this bout of inflation has always been whether it’s just a temporary hiccup caused by the combination of the pandemic and relief spending, or the start of a potentially longer-term problem. This latest data gives us all a bit more reason to bet it’s just temporary.