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Macro Musings: R.I.P: base effects

The inflation debate took center stage again this week, as consumer prices staged another month of torrid increases. While more voices joined the chorus for the Fed to start unwinding its turbo-charged easy policy, investors were not among them. Stocks moved to another record high and bond yields fell to three-month lows. This should be the final month of outsized annual increases in the consumer price index, as the base effects are aging out of the calculation. Last May was the last of three consecutive monthly declines in prices, and the next CPI report will be compared to a much higher level of prices in June 2020. The fierce competition for workers in certain industries is pushing up labor costs. The good news is that the major beneficiaries are workers in low-paying industries who are finally receiving pay raises equal to high-skilled workers. Overall, worker earnings are still growing at a relatively subdued pace and are not a source of upward price pressures. Pent-up demand, formidable financial resources among households and restraints on supply are the key reasons underscoring the inflation pick-up.

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