The Fed is worried about PCE Core Services ex-Housing (CSXHP) because it sees this category as the least likely to see disinflationary progress owing to wage pressures. However—as we have pointed out—CSXHP is composed of a number of components that are primarily sensitive to things other than wages. Today, we’re going to look at a sector that has contributed an outsize amount to CSXHP’s deviation from consistency with a 2% run rate: airfares.

Airfares make up 75% of Transportation Services and 3% of the overall CSXHP aggregate. There are good reasons to expect strong demand to continue—at least globally due to still-nascent reopening processes in Asia and “revenge” catch-up air travel domestically.  Airlines clearly anticipate this demand, as aircraft capex has boomed in recent months. On the supply side though, it’s not clear that wages are the source of higher prices, as the Fed’s approach assumes by implication.

Historically, the cost of airfares are driven by the most volatile component of airlines’ total cost structure: jet fuel.

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