Warm CPI Report Suggests Fed’s Job Not Quite Done

Core inflation in the US was a little warm last month, hotly-anticipated data released on Wednesday showed.

The 0.3% increase on the core gauge topped estimates. Economists expected a third consecutive 0.2% increase.

As expected, the headline all-items index rose 0.6% from July, the briskest pace since inflation peaked in June of 2022.

Unrounded, the MoM core and headline prints were 0.2785% and 0.63119%, respectively. The YoY readings were 4.3% and 3.7%, in-line with estimates.

Obviously, rising gas prices were behind the jump on the headline gauge. The gasoline index rose nearly 11% MoM, accounting for more than half of the monthly gain for the all-items index. Note: The gasoline gauge was still down more than 3% compared to the same month a year ago.  The energy index rose 5.6% from July to August.

The food at home gauge rose 0.2% MoM. On a YoY basis, grocery price inflation was less than 3%. The high, reached in August of 2022, was 13.5%.

Electricity prices rose 0.2% from July, and 2.1% compared to August of last year. The high for the unadjusted series measured on a YoY basis was nearly 16% last summer.

As the figure above shows, the burdensome conjuncture that existed for more than a year has now mostly resolved, with the (very important) caveat that a slower pace of price gains after a bout of runaway inflation doesn’t mean prices are falling. You need outright deflation for that.

Meanwhile, key shelter gauges moderated further. OER posted its smallest MoM gain in two years.

The rent of primary residence index posted a quicker MoM gain compared to July’s reading, but the overall shelter index receded.

Of course, house prices are rising again as buyers still outnumber sellers for scarce resale properties, and builders struggle to fill the void. Elevated mortgage rates have curbed demand, but they’ve also limited the number of existing homes on the market, creating a mismatch. New construction is trying to catch up, but it’s tough.

Elsewhere in the report, used vehicle prices spent another month in deflation both on a MoM and YoY basis. That’s good from a utilitarian perspective, but not so good for anyone who paid up for a used car during the pandemic and stretched the payments out over five years.

Apparel inflation has largely normalized. Price growth for transportation services rose 2% from July, the largest monthly increase since April of 2022. The YoY reading there was 10.3%.

Finally, the CPI-derived versions of the Fed’s “core services ex-housing” measure were hot at 0.53% and 0.37% in August versus 0.22% and 0.195% in July.

Between the meaningfully higher (and unofficial, I’d note) supercore prints and the upside core reading, Wednesday’s data skewed hawkish vis-à-vis Fed expectations.

The figures weren’t enough of an upside surprise to put a September hike back on the table. They were, however, warm enough to ensure that the message from Jerome Powell remains centered around vigilance — and synonyms thereof.