Economic Update: Inflation & Labor Cost

Economic Update: Inflation & Labor Cost

Small business owner optimism rebounded in August, according to the latest NFIB survey. Specifically, the headline sentiment gauge rose to 100.1 last month, the 2nd-highest reading of 2021 to date.

The improvements were broad based in August, although a notable weak spot was owners’ outlook on current earnings trends. This is likely related to this year’s marked uptick in input cost inflation which has eroded profitability for any firms unable to pass the additional costs on to customers or offset the rising outlays with productivity gains.

As explained in previous blog posts, though, many of the recent drivers of upward price pressures are likely to be ephemeral, and this was supported by the latest reading on the consumer price index from the U.S. Labor Department. Indeed, headline CPI rose 0.3 percent in August, and core CPI, which excludes the more volatile food and energy categories, climbed by 0.1 percent, both the smallest monthly gains of the year and below analysts’ expectations. To be fair, however, one could argue this is more a reflection of how the ongoing distortions caused by the pandemic continue to confound the forecasting consensus, in turn resulting in numerous apparent inflationary overshoots and undershoots. Moreover, with too many variables continuing to obscure real trends right now this only supports our earlier suggestion that more clarity on inflation likely will not be available until 2022 at the earliest.

Evidence of the pandemic’s ongoing impact on inflation measures can be seen in the components driving the weaker-than-projected print in August, i.e. transportation services (airfares, motor vehicle insurance, car rentals) fell 2.3 percent, and lodging away from home (hotels) declined by 3.3 percent. These are all categories one would expect to be under pressure if the Delta variant depressed travel in August. As such we should see a rebound in these areas in the months ahead should COVID hospitalizations continue to fall. The index for used cars and trucks also fell in August (-1.5 percent), ending a series of five consecutive monthly increases, but recent wholesale auction trends suggest this too could be short lived. Another thing unlikely to be a drag on inflation measures anytime soon is shipping costs, particularly freight prices, which should stay elevated following tightened restrictions in China as the country is dealing with its own resurgence in COVID cases.

Again, though, many of these reopening categories that pushed CPI higher this year are set to become a drag whenever the pandemic-related bottlenecks and other disruptions finally fade. For example, supply-constrained industries such as semiconductor manufacturing, and transportation and travel services have contributed more than a full percentage point to the yearly growth in core CPI, a significant change from 2019 (pre-pandemic) when the contribution from these components was less than 0.01 percentage points. Shelter costs (rent), however, may prove to be a more lasting tailwind for inflation measures, at least in the year ahead, and another key unknown remains wage growth and how quickly it will normalize. While some of the recent labor market challenges appear tied to transitory factors, others could take much longer to resolve. The sooner “wageflation” can moderate the better considering that the percentage of small business owners in the latest NFIB survey citing “labor costs” as their single most important problem climbed to the highest level in roughly half a century last month.

What To Watch This Week:


  • Housing Market Index 10:00 AM ET


  • FOMC Meeting Begins
  • Housing Starts and Permits 8:30 AM ET
  • 20-Yr Bond Auction 1:00 PM ET


  • BA Mortgage Applications 7:00 AM ET
  • Existing Home Sales 10:00 AM ET
  • EIA Petroleum Status Report 10:30 AM ET
  • 2-Yr FRN Note Auction 11:30 AM ET
  • FOMC Announcement 2:00 PM ET
  • Fed Chair Press Conference 2:30 PM ET


  • Jobless Claims 8:30 AM ET
  • Chicago Fed National Activity Index 8:30 AM ET
  • PMI Composite Flash 9:45 AM ET
  • Leading Indicators 10:00 AM ET
  • EIA Natural Gas Report 10:30 AM ET
  • Kansas City Fed Manufacturing Index 11:00 AM ET
  • 2-Yr Note Announcement 11:00 AM ET
  • 5-Yr Note Announcement 11:00 AM ET
  • 7-Yr Note Announcement 11:00 AM ET
  • 10-Yr TIPS Auction 1:00 PM ET
  • Fed Balance Sheet 4:30 PM ET


  • 2-Yr FRN Note Settlement
  • Loretta Mester Speaks 8:45 AM ET
  • New Home Sales 10:00 AM ET
  • Jerome Powell Speaks 10:00 AM ET
  • Bowman and Clarida speak 10:00 AM ET
  • Baker Hughes Rig Count 1:00 PM ET

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