Weekly Market Recap
Week in review
- U.S. CPI inflation surges to 5.4% y/y in June
- China real GDP expands at 7.9% y/y in 2Q21
- Australia’s unemployment rate drops to 4.9%
- RBA minutes of July policy meeting
- Australia retail sales for June
- U.S. and Eurozone PMI’s for July
Thought of the week
The rate of inflation surged in June in the U.S. as supply disruptions saw used car prices spike, lifting the overall rate of inflation. This temporary force, along with others, are the ones that can be labelled transitory. The factors that can lead to more persistent levels of higher inflation are wages and shelter costs. Shelter accounts for a third of the U.S. CPI basket, making it an important contributor to the inflation outlook. Shelter costs and rents also move in bigger and stickier cycles than other services-related inflation components (see chart). Rents in the U.S. fell during the pandemic as many workers moved away from crowded cities or purchased their own homes as interest rates fell. However, with the impacts of the pandemic subsiding in the U.S., some of this is now starting to reverse. Costs associated with shelter, along with wage growth, are the forces that will determine whether the inflation rate in the U.S. settles in above the 2% pace after distortions have passed.
Shelter costs could drive longer term inflation
U.S. CPI inflation components, y/y
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