BlackRock Investment Institute

Macro insights

Inflation and the restart

U.S. inflation increased slightly slower in July than in previous months, the latest consumer price index (CPI) data showed. This was a result of lower price pressures in some of the main contributors to CPI increases during the economic reopening so far, such as used cars. Yet there is also evidence of price pressures broadening out elsewhere, especially in restaurants and recreation. See the chart.

Inflation make-up reflects restart

Chart showing the Covid-related contribution to CPI

Sources: BlackRock Investment Institute, Bureau of Labor Statistics, with data from Haver Analytics, August 2021. Notes: Bars show the percentage point contributions to the month-on-month change in the core consumer prices index. The Covid basket is a collection of items that we believe are most impacted by the reopening of the economy, and comprises apparel, lodging, airfares, used cars, auto insurance and car rentals. OER is owner-equivalent rent, a measure of the cost of owner-occupied housing. Other core CPI are all other items in the core CPI index.

These short-term dynamics reflect ongoing supply and demand disruptions resulting from the economic restart, in our view, and should be seen as distinct from medium-term factors. It is the latter – including new central bank frameworks and higher production costs – that we see driving inflation close to a 3% annual rate over the coming years.

Federal Reserve officials are also starting to welcome higher inflation as helping it achieve its 2% average target and to anchor inflation expectations near that level. This underscores our new nominal theme - central banks will respond in a more muted way to inflation than they did in the past.

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Elga Bartsch
Head of Macro Research
Read bio
Nicholas Fawcett
Macro Research

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