A person shops at a supermarket as inflation affects consumer prices in New York, on June 10, 2022.
Andrew Kelly | Reuters
For most of the year, the tradition among many economists and policymakers was that this was essentially a food and fuel problem. Once supply chains are freed up and gas prices come down, it was thought that this would help lower food costs and in turn ease price pressures across the economy.
august consumer price index numbershowever, they have severely tested that narrative, with widening increases now showing that inflation could be more persistent and robust than previously thought.
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CPI excluding food and energy prices — so-called core inflation — rose 0.6% for the month, double the Dow Jones estimate, bringing the cost of living up 6.3% year-over-year. Including food and energy, the index rose 0.1% month-on-month and a robust 8.3% on a 12-month basis.
At least as important, the source of the increase was not gasoline, which fell 10.6% for the month. While the summer drop in energy prices helped moderate headline inflation numbers, it failed to quell concerns that inflation will remain a problem for a certain period of time.
Rather than fuel, it was food, shelter and medical services that drove up costs in August, imposing a costly tax on those who could least afford it and raising important questions about where inflation comes from.
“The core inflation numbers were hot across the board. The breadth of strong price gains, from new vehicles to medical care services to rent growth, all rose sharply,” said Mark Zandi, chief economist at Moody’s Analytics. “That was the most disturbing aspect of the report.
Prices for new vehicles and medical care services increased by 0.8% over the month. Shelter costs, which include rent and various other housing-related expenses, account for nearly a third of the CPI’s weight and rose 0.7% for the month.
The cost of food was also prohibitive.
The food at home index, a good indicator of food prices, rose 13.5% over the past year, the biggest such increase since March 1979. Prices continued to skyrocket for items such as eggs and bread, further straining household budgets.
For medical care services, the 0.8% month-on-month increase is the fastest monthly gain since October 2019. Veterinary costs rose 0.9% month-over-month and were up 10% year-over-year.
“Even things like clothing prices, which often go down, have gone up a bit [0.2%]. My view is that with these lower oil prices they are holding and, assuming they don’t go back up, there will be a broad easing of inflation,” Zandi said. “I have not changed my inflation forecast to go back to [the Federal Reserve’s 2% target] early 2024, but I would say I hold this forecast with less conviction.”
On the plus side, the prices of air tickets, coffee and fruit have come down again. AND survey released earlier this week The New York Fed showed that consumers are becoming less afraid of inflation, although they still expect the rate to be 5.7% a year from now. There are also signs of this supply chain pressures are easingwhich should at least be disinflationary.
But about three-quarters of the CPI remained above 4% year-over-year inflation, reflecting a longer-term trend that belies the idea of ”transitional” inflation promoted by the White House and the Fed.
And keeping energy prices low is not a given.
The US and other G7 countries say they intend to apply price controls to Russian oil exports starting December 5thwhich could trigger retaliation that could lead to higher prices later in the year.
“If Moscow halts all natural gas and oil exports to the European Union, the United States and the United Kingdom, then it is highly likely that oil prices will retest the highs set in June and cause the average price of conventional gas to move well back above the current 3 .70 a gallon,” said Joseph Brusuelas, RSM’s chief economist.
Brusuelas added that while housing is in the doldrums and a possible recession, he thinks the decline in prices is unlikely to play out there, he has “about a good year before the data improves in this critical ecosystem.”
With so much inflation still brewing, it’s a big economic question how far the Fed will go with interest rates rising. Markets are betting that central banks will raise benchmark rates next week by at least 0.75 percentage pointwhich would push the Fed Funds rate to its highest level since early 2007.
“Two percent represents price stability. It’s their goal. But how do they get there without breaking something,” said Quincy Krosby, chief equity strategist at LPL Financial. “The Fed is not done. The road to 2% will be difficult. Overall, we should start to see inflation continue to decline. But at what point will it stop?”