The next main inflation data release is CPI inflation for August reported on Tues, Sep 13 (https://www.bls.gov/bls/newsrels.htm). Indications are, like the last release for July, that inflation is moderating. Oil, copper, aluminum, lumber prices are lower.
More recent news about slowdowns in Europe and China add weight to evidence that reductions in demand might further ease inflation. OPEC actually cut its production quota (https://www.bloomberg.com/news/articles/2022-09-06/oil-holds…), suggesting a concern about demand.
One could easily argue that if it weren’t for the Russia war and subsequent supply shocks, that inflation would be quite moderate by now as the world emerges from the strongest shocks of the pandemic.
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I made this comment above:
One could easily argue that if it weren’t for the Russia war and subsequent supply shocks, that inflation would be quite moderate by now as the world emerges from the strongest shocks of the pandemic.
Thinking about this further, I looked at the monthly, unadjusted CPI data (https://fred.stlouisfed.org/series/CPIAUCNS). Here are the average month-over-month CPI changes for 2020, 2021, and 2022.
2020 Jan-Dec 0.11% pandemic begins (average of 12 months)
2021 Jan-Dec 0.57% pandemic inflation accelerates (average of 12 months)
2022 Jan-Jun 1.02% Russia-Ukraine war begins (average of 6 months)
2022 Jul 0.00% (latest reading)
Inflation was low in 2020, then accelerated to about 7% annualized in 2021, presumably due to pandemic-related effects, both supply side and demand side. Then, in the first half of 2022, inflation accelerates further to about 12% annualized as the Russia-Ukraine war begins.
So we have had two accelerations, one pretty clearly pandemic-related and a second, further incremental acceleration, very closely corresponding with the onset of the Russia-Ukraine war. These distinct accelerations can be seen clearly in the graph provided by the St. Louis Fed up until this year’s latest flat month-over-month reading.
Correlation is not causation, but it looks pretty clear that the war not only continued above-trend inflation but accelerated inflation above and beyond what we had been seeing.
If there are no further big shocks (one can hope), it will be interesting to see how inflation behaves as policies take hold and markets respond. With all of this talk of government rate policies, let’s not forgot the still very large role of markets in shaping supply, demand and prices.
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