Inflation Update
Inflation continues to cool despite hot spots.
Despite hopes for flat-to-negative headline inflation, the August CPI report came in hotter-than-expected as broad-based goods and services inflation offset the impact of large declines in gasoline prices. Headline CPI rose by 0.1% m/m (vs. consensus -0.1%) and Core CPI jumped 0.6% m/m (vs. consensus 0.3%), translating to year-over-year gains of 8.3% and 6.3%, respectively.
Among the highlights:
-Gasoline was a major source of the disinflation, but other categories impacted by commodities have been slower to cool. While gasoline prices fell 10.6%, utility gas spiked 3.5% and electricity prices remain elevated. Food prices also grinded higher, both at grocery stores (0.7%) and restaurants (0.9%).
-Services prices continued to accelerate, with transportation services and medical care services rising 0.5% and 0.8%. However, airline fares continued to decline another 4.6% after falling 7.8% in July.
-Rental inflation, one of the stickiest part of inflation, continued to firm as both tenants’ rent and owner’s equivalent rent rose another 0.7%.
- Despite declines in the Manheim Used Vehicle Index, prices for used vehicles only ticked down by 0.1% and prices for new cars rose 0.8%.
Overall, this report tells us that core inflation continues to run hotter than we’d like, but it’s important to recognize that we are still on the way down to more normal levels. Commodities disinflation should continue to drive declines in prices, particularly as they spill over to other categories such as goods and transportation services. Other economic data continue to point to inflation moderating and we expect measures tied to the auto sector and travel/tourism will be weak in the coming months. Supply chain issues broadly continue to improve as we’ve seen in the Fed’s Global Supply Chain index, and inflation expectations from both consumers and financial participants have now rolled over.
Today the markets responded to the release by fully pricing in a 75bp rate hike at the Fed’s meeting later this month, with some financial participants even positioning for a full 1% rate hike. We think this reaction is slightly overblown, and while we expect the Fed will deliver 75bp of tightening this month, softening inflation and cooling demand across the economy should allow them to follow-up the hawkish rate hike with some patience over the next few months.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.