Inflation Appears Persistent as Used Car and Airline Prices Remain Elevated

Recent developments in key categories that have contributed to the ongoing slowdown in inflation, such as used cars and airfares, have given rise to new upward risks. This has raised questions about whether price pressures in service components like housing will decelerate enough in the coming months to sustain the downward trend.

While there is a perception that the Federal Reserve’s projections for underlying inflation over the next few months are overly optimistic, there is a growing consensus between the central bank and private-sector analysts that a return to the 2% target by 2024 is unlikely.

JPMorgan Chase & Co. Chief Economist Bruce Kasman believes that inflation in “core” consumer prices, excluding food and energy, will bounce back to an annualized run rate of approximately 3.5% over the next six months. This rebound is expected as used-car prices, airfares, and health insurance costs stabilize.

The following factors could potentially hinder the downward trend in inflation in the months following the September inflation report:

Used Cars:

• The surge in used-car prices during the pandemic contributed to inflation.
• Ongoing shortages and the risk of production disruptions from potential strikes could lead to fresh price pressures in the future.
• Inventories of used cars are not expected to improve significantly until 2025.

Airfares:

• Airfares in the Consumer Price Index (CPI) have declined in 11 of the past 15 months.
• While airfares may not actively contribute to inflation in the near future, they may no longer serve as a reliable deflationary factor.
• Airfares are influenced by fuel costs, and rising energy prices could have an impact.

Medical Care:

• Medical care services have acted as a significant deflationary factor in the CPI due to how health insurance costs are calculated.
• This trend is set to reverse in upcoming reports.
• The Bureau of Economic Analysis’s Personal Consumption Expenditures (PCE) price index provides a broader measure of health care costs, and its trajectory will be important for inflation outlooks.

Housing:

• Housing costs are a critical component of both the CPI and the PCE index.
• Rents for new leases surged after the pandemic but had a lag in appearing in official inflation data.
• The balance of supply and demand for housing is uncertain, with both multifamily units pressuring rents lower and rising affordability challenges in the purchase market potentially keeping rental demand elevated.

In conclusion, the path of inflation in the coming months is subject to various factors, and the interplay of these variables will shape the future inflation landscape.