YoY August CPI: 8.3% actual / 8.1% forecast / 8.5% previous
YoY August Core CPI: 6.3% actual / 6.1% forecast / 5.9% previous
US consumer prices were resurgent in August, dashing hopes of a nascent slowdown. These results were above expectations, with the upside surprise on the core more notable. The upside surprise keeps pressure on the Fed to keep tightening policy.
The market plummet just after the data release. The S&P 500 Index is now down -3.00%, the Dow Jones Industrials Index is down -2.70%, and the Nasdaq 100 Index is down -4.20%. The 2 year US Treasury yield moved up 17bps and the 10 year US Treasury yield moved 7bps.
The consumer price index increased 0.1% from July, after no change in the prior month, Labor Department data showed Tuesday. From a year earlier, prices climbed 8.3%, a slight deceleration, largely due to recent declines in gasoline prices.
The so called “core CPI”, which strips out the more volatile food and energy components, advanced 0.6% from July and 6.3% from a year ago. All measures came in above forecasts. Shelter, food and medical care were among the largest contributors to price growth.
The energy CPI fell 5.0% in August, but this was offset by another solid reading on the food CPI (+0.8%) and the increase in the core index. Core services inflation (+0.6%) outpaced core goods inflation (+0.5%), and the rent measures continued to look pretty strong in August (+0.7% gains). There were declines reported for used vehicles (-0.1%) and airfares (-4.6%) as well as a few other categories but these did little to offset strength elsewhere.
Food costs increased 11.4% from a year ago, the most since 1979. Electricity prices rose 15.8% from 2021, the most since 1981. Gasoline prices, meanwhile, fell 10.6% in August, the biggest monthly drop in more than two years.
Shelter costs -- which are the biggest services’ component and make up about a third of the overall CPI index -- continue to rise. Overall shelter costs increased 0.7% from July and 6.2% from a year ago, both the most since the early 1990s.
Economists have been expecting goods prices to cool as pent-up demand leads consumers to shift more of their spending toward travel and entertainment, but both remain elevated.
The acceleration in inflation points to a stubbornly high cost of living for Americans, despite some relief at the gas pump. Price pressures are still historically elevated and widespread, pointing to a long road ahead toward the Fed’s inflation target.
The Fed will continue to hike
The Fed will probably have to maintain at least 75bps in Sept. 21, pushing the expectations for terminal rates above 4%. The more the Fed picks up it hiking pace, the harder it is to make the case that they will be able to maintain that rates level for longer as risks to the economy grow.
Chair Jerome Powell said last week that the central bank will act “ forthrightly” to achieve price stability, and some policy makers voiced support for another 75 basis-point rate hike. Officials have said their decision next week will be based on the “totality” of the economic data they have on hand, which also illustrates a strong labor market and weakening consumer spending.
Traders boosted bets that the Fed will raise interest rates by 75bps, now seeing such an outcome as locked in.
“If there was any doubt at all about 75 -- they’re definitely going 75” at next week’s FOMC meeting, Jay Bryson, chief economist at Wells Fargo & Co., said on Bloomberg Television. “We thought they’d be stepping it back to 50 in November. At this point, you’d say 75 is certainly on the table in November.”
Goldman on the hikes, Jan Hatzius:
“We now expect a 75bp hike in September followed by 50bp hikes in November and December, which would take the funds rate to 4-4.25% by the end of the year."
Fed Funds Futures now pricing in an 80% chance of 75 bps and a 20% chance of a 100 bps hike for September 21st after the US CPI data release.
Persistently high inflation has dragged down President Joe Biden’s approval ratings and threatened Democrats’ chances of retaining their thin congressional majorities in November’s midterm elections.
Biden, in a White House ceremony later Tuesday, plans to argue that he and his fellow Democrats have helped steer the economy back to firmer footing as they tout a sweeping new climate, energy and health care law dubbed the “Inflation Reduction Act.”
Inflation continues to erode Americans’ wage gains. A separate report Tuesday showed real average hourly earnings fell 2.8% in August from a year earlier, continuing a steady string of declines since last April. On a monthly basis, however, real wages grew for a second month.
In the meantime, wages are still increasing in US.