Inflation may have seen the top line number fall month-over-month, but it was much hotter than economists were expecting, according to the August Consumer Price Index.
- Y-O-Y: The Consumer Price Index for All Urban Consumers fell slightly to 8.3% year-over-year, down from 8.5% in July.
- M-O-M: CPI was up 0.1% month-over-month, this is up from the 0.0% reported in July.
Swing & A Miss. Economists were expecting a much better report on all fronts. Economists had projected a 0.1% drop month-over-month and thought inflation would fall to 8%.
Food Costs Cross 11.0%. Food costs jumped over 11% in August with a year-over-year reading of 11.4% thanks to a 0.8% jump from July.
- Cereal & bakery products took the top spot with prices up 16.4% in a year followed closely by dairy (+16.2%), and meats, poultry, fish, and eggs (+13.5%).
- The spread between food at home and away continues to grow. Food at home is now up 13.5% for the year and food away from home is up 8.0%
The silver lining: gas prices. Energy costs were the only bright spot in this month’s report. Gasoline prices fell 10.6% in August and are now only up 25.6% year-over-year.
- Electricity prices didn’t fall but this was the slowest increase in three months with a 1.5% increase in August which puts prices up 15.8% year-over-year which is the highest level since 1981.
Shelter Costs Rise. The bad news for inflation doves is the rise in shelter costs. Home prices and rents in CPI lag real-time data and this has caused some to question the CPI data over the last year. However, shelter costs have slowly been rising and in August the index hit a month-over-month high of 0.7% which puts the annual rate at 6.2%.
- Rent of primary resident was up 0.8% month-over-month and is now up 6.7% when compared to August 2021. This is the highest level since 1986.
- Owners equilivant rent of residence was up 0.7% from July and is now up 6.3% year-over-year.
Analysis. All eyes are now on the Fed and how they will react to the August report.
- Goldman Sachs slightly raised expectations on future rate hikes: “We have raised our forecast for the Fed’s December meeting to a 50bp rate hike (vs. 25bp previously). 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.”
- Neil Irwin at Axios was more hawkish: “0.75ppt was already baked in for next week, but this makes the odds of more large hikes to close out the year higher.”
BOTTOM LINE: This was a disappointing report and interest rates are going higher for longer.