The Summer Inflation Pause Will Be Short-Lived

By Fall the inflation rate will rise perhaps nearing double-digit levels by early next year.

The good news is that inflation, as measured by the Consumer Price Index, slowed to near zero in July and August. The bad news is this inflation pause is temporary. The September monthly CPI number will increase to the 0.5% range and move much higher as we approach year-end.

In June, the annual increase in the CPI was 9.1%. With the low monthly numbers in July and August, the annual CPI fell to 8.3%. A close look at the components shows why the inflation rate fell and why it will increase in the fall.

Oil prices in the global market and gas prices in the domestic market dropped dramatically in July and August and have continued their decline more modestly into September. Those prices account for about 30% of the calculation of the CPI.

In August, energy prices fell by more than 10%. Economists expected the inflation rate for other consumer products like food and rent to rise only modestly. Had that happened, the CPI for August would have been negative. Instead, the number was slightly positive. That spooked the investment community, resulting in the largest one day-drop in stock values in more than two years.