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U.S. consumer prices are running at the highest level in a generation, but core inflation in July posted its smallest rise in three months. Anthony Okolie speaks to James Orlando, Senior Economist, TD Bank, about the inflation outlook and its impact on the U.S. economic recovery.
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- In June, US consumer prices surged to the highest pace of inflation in 13 years. But inflation cooled in July with core prices excluding food and energy posting its smallest rise in three months. So has US inflation peaked? Or will price pressures continue to escalate? For more, we're joined with James Orlando, Senior Economist at TD Bank. James, what's your take on the latest US inflation data, which came in more moderate than expected?
- Yeah. Thanks, Anthony. It's a situation where inflation really seems to have hit a boiling point. A lot of the factors that had been driving higher inflation over the last few months, things like the re-opening activity that caused people to want to go on vacation, whether it be people needing to buy airfares or rent a car, buying used cars, for example, all of those factors eased a little bit. And that's why inflation didn't continue to accelerate in July.
But at the same time, we're also seeing other factors starting to make up that space that is being left from the travel set side of things, things like food price inflation. The impact of higher housing costs and higher housing prices on the inflation data are starting to come through. So it's a mixed bag of things right now. You're starting to see reduced prices in some areas but increased prices in others.
- And you mentioned it's a mixed bag. Are we starting to see signs of this mismatch between supply and demand, which, of course, was caused by the supply chain issues during the pandemic-- are we seeing this mismatch beginning to shrink in a few categories?
- Certainly. Obviously, the supply bottlenecks that we saw. Everyone highlights the semiconductor space. That's easing a little bit, but it's still very present. And it takes a long time for these factors to ease off.
We know that in Canada, based on our history of commodity cycles, how long it takes for the supply-demand mismatch to even itself out. But you ask any business owner right now, they're going to tell you that it's hard sourcing materials. It's hard sourcing getting access to materials.
Prices are rising, and delay times are increasing. And so that's coming through very apparently. And it's not just like turning on a faucet. You can't just turn it on and the supply comes through. So it takes a long time. So even though you might see it in certain areas, definitely it's something that going to persist for quite a little bit longer.
- And, of course, the US Fed has reasserted their view that inflation is transitory and that the US recovery is well underway, and the groundwork has been set for tapering its asset purchase program. But what do you expect to hear from the Fed in the upcoming Jackson Hole symposium this week?
- Yeah. So Fed chair Jay Powell has been very tight lipped about upcoming policy changes. I think the Delta variant is very much on their mind. They want to see further improvement in the overall economy before they announce a change. From our point of view, though, given where the economic recovery is right now, given all the efforts by the Federal Reserve to push down yields, push down corporate bond rates through their quantitative easing program, we're already seeing that impact right now.
We have a situation where debt levels are rising due to this incentive. Equity prices are at sky high levels. Even house prices are soaring right now. And so the idea that the Federal Reserve needs to continue reducing and putting pressure on yields to keep low-- to be able to incentivize rises in house prices, it doesn't make much sense anymore. And so our view is that even though the Fed might not announce anything at the Jackson Hole, I think that the taper announcement is going to be coming in the not-too-distant future.
- And what are you currently watching to help gauge US consumer prices? And what impact could the Delta variant have on inflation?
- I think the economic recovery is probably the most important factor for overall inflation. If things keep going in a positive direction, then you're going to be looking at the demand side stepping up and taking over the supply side impact on inflation. The Delta variant is obviously risk number one on everyone's minds to see if there is a hiccup in economic growth.
But we're in a unique situation right now where wages are rising. If you ask any-- if you ask businesses, and you look at the surveys, normally, businesses don't pass on higher prices on to consumers as much as they're talking about doing right now. But they're saying that their prices are rising for inputs, for wages. And they're going to pass on those higher costs to consumers.
And there's a circular thing that kind of goes on here where these higher prices, consumers are saying, oh, my prices are rising. And so they start demanding higher and higher wages to their employers, and then that circular thing happens where that then gets passed on through higher consumer prices. And so the wheels have been set in motion right now. And I think that given where the economy is going right now, assuming that we can move past the Delta variant, we're in a situation where inflation could remain fairly elevated for the next little while.
- And can you talk about your outlook for US inflation? Has your forecast changed?
- No, our forecast is-- we've definitely been in the camp that this 4% to 5% inflation we've been seeing is going to make way for 2% or 3% inflation. And the reason why is because the supply chain stuff that has been leading to really high prices, so historically high prices, that should ease over the next 12 months. That's sort of the basis of that.
But at the same time, the strength of the economy where more and more people are getting jobs, incomes are rising, people are feeling pretty good about the economy, equity prices are rising, home prices are rising, people feel wealthier, that's going to increase consumer spending. And that is going to sustain the demand side that keeps inflation closer to 2% to 3%.
- James, thank you very much for your time.
- Thank you.
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- In June, US consumer prices surged to the highest pace of inflation in 13 years. But inflation cooled in July with core prices excluding food and energy posting its smallest rise in three months. So has US inflation peaked? Or will price pressures continue to escalate? For more, we're joined with James Orlando, Senior Economist at TD Bank. James, what's your take on the latest US inflation data, which came in more moderate than expected?
- Yeah. Thanks, Anthony. It's a situation where inflation really seems to have hit a boiling point. A lot of the factors that had been driving higher inflation over the last few months, things like the re-opening activity that caused people to want to go on vacation, whether it be people needing to buy airfares or rent a car, buying used cars, for example, all of those factors eased a little bit. And that's why inflation didn't continue to accelerate in July.
But at the same time, we're also seeing other factors starting to make up that space that is being left from the travel set side of things, things like food price inflation. The impact of higher housing costs and higher housing prices on the inflation data are starting to come through. So it's a mixed bag of things right now. You're starting to see reduced prices in some areas but increased prices in others.
- And you mentioned it's a mixed bag. Are we starting to see signs of this mismatch between supply and demand, which, of course, was caused by the supply chain issues during the pandemic-- are we seeing this mismatch beginning to shrink in a few categories?
- Certainly. Obviously, the supply bottlenecks that we saw. Everyone highlights the semiconductor space. That's easing a little bit, but it's still very present. And it takes a long time for these factors to ease off.
We know that in Canada, based on our history of commodity cycles, how long it takes for the supply-demand mismatch to even itself out. But you ask any business owner right now, they're going to tell you that it's hard sourcing materials. It's hard sourcing getting access to materials.
Prices are rising, and delay times are increasing. And so that's coming through very apparently. And it's not just like turning on a faucet. You can't just turn it on and the supply comes through. So it takes a long time. So even though you might see it in certain areas, definitely it's something that going to persist for quite a little bit longer.
- And, of course, the US Fed has reasserted their view that inflation is transitory and that the US recovery is well underway, and the groundwork has been set for tapering its asset purchase program. But what do you expect to hear from the Fed in the upcoming Jackson Hole symposium this week?
- Yeah. So Fed chair Jay Powell has been very tight lipped about upcoming policy changes. I think the Delta variant is very much on their mind. They want to see further improvement in the overall economy before they announce a change. From our point of view, though, given where the economic recovery is right now, given all the efforts by the Federal Reserve to push down yields, push down corporate bond rates through their quantitative easing program, we're already seeing that impact right now.
We have a situation where debt levels are rising due to this incentive. Equity prices are at sky high levels. Even house prices are soaring right now. And so the idea that the Federal Reserve needs to continue reducing and putting pressure on yields to keep low-- to be able to incentivize rises in house prices, it doesn't make much sense anymore. And so our view is that even though the Fed might not announce anything at the Jackson Hole, I think that the taper announcement is going to be coming in the not-too-distant future.
- And what are you currently watching to help gauge US consumer prices? And what impact could the Delta variant have on inflation?
- I think the economic recovery is probably the most important factor for overall inflation. If things keep going in a positive direction, then you're going to be looking at the demand side stepping up and taking over the supply side impact on inflation. The Delta variant is obviously risk number one on everyone's minds to see if there is a hiccup in economic growth.
But we're in a unique situation right now where wages are rising. If you ask any-- if you ask businesses, and you look at the surveys, normally, businesses don't pass on higher prices on to consumers as much as they're talking about doing right now. But they're saying that their prices are rising for inputs, for wages. And they're going to pass on those higher costs to consumers.
And there's a circular thing that kind of goes on here where these higher prices, consumers are saying, oh, my prices are rising. And so they start demanding higher and higher wages to their employers, and then that circular thing happens where that then gets passed on through higher consumer prices. And so the wheels have been set in motion right now. And I think that given where the economy is going right now, assuming that we can move past the Delta variant, we're in a situation where inflation could remain fairly elevated for the next little while.
- And can you talk about your outlook for US inflation? Has your forecast changed?
- No, our forecast is-- we've definitely been in the camp that this 4% to 5% inflation we've been seeing is going to make way for 2% or 3% inflation. And the reason why is because the supply chain stuff that has been leading to really high prices, so historically high prices, that should ease over the next 12 months. That's sort of the basis of that.
But at the same time, the strength of the economy where more and more people are getting jobs, incomes are rising, people are feeling pretty good about the economy, equity prices are rising, home prices are rising, people feel wealthier, that's going to increase consumer spending. And that is going to sustain the demand side that keeps inflation closer to 2% to 3%.
- James, thank you very much for your time.
- Thank you.
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