Rebound in inflation has further to run

Although core CPI inflation remains muted at 1.6% in July, the surge in prices last month specifically could be the start of a more significant rebound, as the added costs and ongoing supply constraints stemming from the pandemic and physical distancing offset the disinflationary impact from weak demand. The prices of the goods and services that fell most sharply at the start of the pandemic – like air fares, hotel room rates and motor vehicle insurance rates – are now rebounding, while low inventories explain the surge in motor vehicle prices. With unit labour costs up sharply in the second quarter, money supply soaring, and inflation expectations unusually resilient given the extent of the economic downturn, there are plenty of other reasons to suspect that the balance of risks for inflation lie predominantly to the upside.