Market participants and policymakers hoping for additional evidence of cooling inflation in the US were dealt a grievous blow Tuesday, when data showed core price growth ran at twice the expected rate in August.
Excluding food and energy, consumer prices rose 0.6% from July, double the expected rate (figure below).
It was a bitter disappointment. Although analysts, economists and most traders expected core price growth to remain firm, the acceleration was unexpected and decidedly unwelcome.
The 0.6% pace suggested underlying inflation isn’t moderating. Far from it. August’s rate was consistent with this year’s hottest monthly prints.
Although the headline gauge rose just 0.1% in August, that too was disappointing. The market expected a small decline on the back of falling energy prices.
Both the headline and core gauges printed ahead of expectations on a 12-month basis, the former at 8.3% and the latter at 6.3% (figure below).
Again, this was an unwelcome development. There was speculation that the figures would undershoot consensus. So, in that context, the overshoot was insult to injury.
Energy prices tumbled, as expected. The 10.6% decline on the gasoline gauge came on the heels of a 7.7% decline the prior month, and counted among the largest monthly declines on record. Consumers will take it, of course. But it’s somewhat vexing that the headline CPI print was hot in spite of tumbling energy.
The electricity gauge notched another strong monthly gain. Although the pace of price growth for groceries moderated significantly last month, the food at home gauge still rose 0.7% from July. The figure (below) remains highly disconcerting. On a 12-month basis, the electricity and food at home gauges notched gains of 15.8% and 13.5%, respectively.
It’s exceedingly rare that both grocery and electricity prices rise at a double-digit annual rate. That’s been the case in the US for six months running.
Do note: There’s little, if anything, the Fed can do about that. Some readers will point to the chart and say “Clearly there is, considering rate hikes cured the situation four decades ago.” I’d respond with a question: Are rate hikes going to affect your use of electricity or your predisposition to eat food? I certainly hope not.
The BLS, sounding chipper, helpfully noted that the overall food index’s 0.8% gain in August was “the smallest monthly increase since December.” If that doesn’t make you feel better, maybe you’re just hungry. You’re not yourself when you’re hungry. Grab a ($5) Snickers.
Speaking of things people need no matter the price, the shelter gauge notched a 0.7% monthly increase. The BLS didn’t have much to offer in the way of cheerful spin on that. It was the hottest print since 1991 (figure below).
Rent and OER logged similarly outsized gains. The 0.71% OER print was among the five largest monthly increases in series history.
Simply put: Shelter prices are rising at what, for a very large subsection of the populace, may as well be the fastest pace on record. If you weren’t alive the last time the cost of putting a roof over your head was rising this rapidly, it’s a record.
New car prices rose at the briskest pace since May, apparel prices started rising again after a brief respite, medical care services logged the largest monthly increase since October 2019 (and the fifth largest in 30 years) and transportation services costs rose 0.5% from July and 11.3% from 2021.
All in all, August’s CPI report was a disaster. Not necessarily by comparison to this year’s worst reports, but certainly versus expectations and absolutely in the context of what citizens in advanced economies became accustomed to over the past 40 years, a period of macro stability which looks more and more like the exception than the norm every month.
The figures came less than 24 hours after a New York Fed survey suggested Americans’ inflation expectations tumbled last month.
Perhaps we get to the soft landing by strengthening the dollar so much that the rest of the world gets put out of work, but not here.
“Some readers will point to the chart and say “Clearly there is, considering rate hikes cured the situation four decades ago.” ”
I am no food inflation expert but I hope the fed is doing a deep dive into what is driving the increases in this sector. If these increases are driven primarily by droughts and the war as many suggest then I cannot see what they are hoping to accomplish with a 75bps hike? Demand destruction for an inelastic good?
While I don’t know if the Fed can do much with food or energy inflation, you could argue that food substitution can be part of the equation (e.g. store brand instead of name brand, rice instead of meat, etc.). Similarly with electricity, people might opt to turn down the heat and add an extra layer of clothing. I’d say demand destruction is more of a factor in services and consumer goods.
Sources of food inflation
Number one with a bullet: energy costs. The raw material for fertilizer is natural gas. NG is doing this: https://quotes.ino.com/charting/?s=NYMEX_NG.V22
Harvesters, shipping, processing, it all runs on diesel and electricity.
Number two: shipping costs (so supply chain constraints).
Number three: climate change. The best exmple is from India/Pakistan. This spring saw all-time record heat (>120 degrees), which reduced spring crop yields by >15%. Even with ample water, plants grow slower and smaller when it’s too hot. Now Pakistan is underwater, and it’s primarily agricultural areas that are affected.
Labor costs are a bigger deal for end-product costs. A sack of flour or rice doesn’t have a big labor component, but a packaged frozen meal does. Plus, the grocery store has to pay their employees (and their electricity bill).
Finally, the Ukraine war is just icing on the cake.
#3 may wax and wane but it ain’t going away in our life times, the stabilization reservoir is still practically empty.
Energy inflation won’t go down till we are already in a recession , but like Walt said few people are going to higher thermostats in summer and lower them in winter. A long term solution is to increase tax break for solar to 75% for solar panels and heat pumps. This will reduce dependence on oil and gas permanently.