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The truth is, inflation is slowly, and I stress slowly, moving lower and is still far away from the Federal Reserve’s 2% target. The best news from the latest Consumer Price Index (CPI) report is that core year-over-year inflation fell to the lowest level since September 2021 and is more than two points from its recent peak. The not so good news is that August CPI highlighted some areas still plagued with high prices, causing overall inflation to remain sticky. Headline inflation rose 0.6% in August, the highest level in 18 months and the first increase in four months, while core inflation rose for the first time since February.
The culprits behind the August increase were energy and transportation services. Energy costs rose 5.6%, including a 10.6% surge in gasoline, which accounted for over half of the CPI increase. While the Fed may be able to look past volatile energy costs, it may be harder to dismiss the broader impact of transportation costs which include car repair, car insurance and airfares. Airline prices jumped 4.9%, the first rise in four months. On a more positive note, some of the stickier areas are beginning to show relief. Used car prices fell for the third month in a row and shelter costs rose the least amount in at least eight months. Shelter costs year-over-year likely peaked at 8.2% in March and are expected to decline to below 6% by year-end.
The case was the same with wholesale prices in August. Gasoline costs surged 20%, pushing up the monthly and year-over-year headline Producer Price Index (PPI) levels to 0.7% and 1.6%, nearly double the amount from July. The core rates, which eliminate food and energy costs, were up 0.2% and 2.2% respectively. The year-over-year rate is the lowest since January 2021. The prices of goods increased 2%, though excluding energy and food, they were up 0.1%. Overall services costs rose 0.2% after a 0.5% gain the prior month.
The question for the Fed is how will the economy digest the rise in energy prices – will the costs eventually bleed into other areas of the economy, mainly to services, or dissipate once the price of oil moves lower? Going forward, gasoline should play a more muted role in the September inflation reports. The average daily price has declined 0.6% so far this month. Yet over 40% of the key categories in the index continue to reflect price increases of over 4% on an annualized basis. Bringing core inflation below 4%, much less to 2%, is going to be much more tedious than was the move down from 6.6%.
Key Indicators this Week
Retail Sales– August retail sales rose 0.6% at both the full and ex-transportation measures. The increase was more than expected but less than July sales. Just as with the inflation data this week, the strength of the index came primarily from high gasoline prices. Sales at gasoline stores surged 5.2% (and this wasn’t due to an increase in snacking). When gasoline sales are removed from the index, sales were up 0.2%, among the weakest this year. The control group measure, which feeds into GDP and eliminates most of the volatile categories, rose 0.1%. This measure is considered to be a better gauge of underlying consumer demand. While the consumer remains somewhat financially stable, many economists expect this to change as savings levels continue to fall and student loan payments begin next month. Ten out of the 13 major categories in the retail sales index posted gains. The only three categories with negative sales were furniture, sporting goods and miscellaneous.
Sarina Freedland – Senior Investment Officer
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