Core #CPI surprised to the upside, driving a solid gain in headline #inflation as well. The strength in the July report was driven by components impacted by #Covid unwinding some of their previous large declines and bouncing back from depressed levels.
We saw solid gains in transportation services components, such as #airfares, motor vehicle #insurance and rental #cars, which reflect that bounce back.
The #monetary and #fiscal policy responses to the crisis have credibly bridged the #economic gap caused by the unprecedented lockdowns, yet as #inflation deficiencies were already present pre-Covid, it’s likely that #policy will need to remain supportive for some time.
Many commentators argue that heightened policy #liquidity could result in a dramatic acceleration of #inflation, which could then take #MonetaryPolicy off its near-to-medium-term path, but we suggest that the historical evidence does not bear that out.
In our view, the key to near-term #monetary policy will be all about the @federalreserve’s urgent attempts to support #labor #market recovery to the greatest possible extent, but how far the central bank will be willing to go will largely depend on #inflation remaining contained.
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