Rent: The decline in home ownership and increase in renting distorts how the shelter component of inflation is calculated. (See this and this). But the biggest inflation related problem in shelter has been the lack of homes for sale, sending prices up, which has led to the huge increase in demand for rentals. This has been a persistent inflationary factor.
Energy: The biggest component of inflation of late has been energy prices. Crude oil was about $45 a barrel one year ago; today it is $75 down from $80 in May. This is the dominant component of that big year over year gain. If geopolitics causes a spike in prices, it could force the Fed’s hand.
My best guess is that we will see modest increases in payroll gains, even as unemployment falls more. I am less concerned about supply constraints for energy, as the oil-frackers tend to crank up supply in response to higher prices. Shelter, although a substantial portion of the total CPI basket, doesn't appear to be running amok outside of a few urban hot spots.
The bottom line is that inflation is still only modest, with deeply entrenched deflationary forces, and a central bank ready to tighten first and ask questions later. They will cause a recession before they allow inflation to run amuck.
This column was provided by Bloomberg News.