The consumer price index accelerated to 0.6% in August
The path back to a normalized inflation environment continues, but August’s results are a reminder that it’s not a straight line to that destination. The headline consumer price index (CPI) accelerated to 0.6% — the largest single-month increase since June 2022. While notably outpacing recent monthly gains, it wasn’t unexpected; the consensus forecast had called for a 0.6% gain.
Rising fuel prices, which soared by more than 10% in August, were a major driver of the increase. Higher crude oil prices played a role, as did extreme heat in the Gulf Coast region, which impaired refinery activity and reduced output.
Food prices rang up a more palatable increase of 0.2% for the month. Over the past year, the cost of food has risen by 4.3% — still at least a source of frustration for households trying to keep pantries stocked, even if the pace of increase has moderated considerably since peaking earlier in the cycle.
Core prices, which exclude food and energy, rose by 0.3% in August and increased 4.3% over the past 12 months. That was the slowest 12-month gain in nearly two years, providing some additional reason that consumers can at least breathe a sigh of relief that the worst of the recent inflation episode appears to be over.
It doesn’t mean that a return to 2% will be immediate or easy.
Service sector inflation remains brisk — a byproduct of tight labor markets and a dearth of affordable housing after years of underinvestment. Both appear well positioned to moderate over the coming year as labor demand cools and rental rates stabilize.
Despite signs of progress, there are still other risks to consider. Although a brief disruption in production would have little inflationary impact, a prolonged UAW strike could reignite pressure under car prices. Falling prices for used cars in recent months have helped to blunt the effect of continued inflation in other sectors of the economy. That could reverse course if demand is sustained and new car inventories are chewed down over time.
Transportation costs also remain an area of concern, having risen by more than 10% over the past year. Higher energy costs have rippled through to pricing for public transportation and airfares. A slowdown in demand could take the edge off, but geopolitical rifts and constrained OPEC production could make it difficult to trim prices too aggressively even if demand slips.
What does the August inflation report mean for the forthcoming Fed decision? Very little. It reinforces the existing evidence of a gradual easing of inflation pressures in conjunction with an ongoing cooldown in labor market conditions. Given the totality of recent data and the Fed’s previously stated mindset around rate policy, policymakers appear poised to stand pat next week. Whether another increase could be on the table later this year will depend on the tone of incoming data in the months ahead.
Given broad evidence of a cooling economy and the inherent uncertainty given the lag in the impact of monetary policy changes being readily apparent, signs of a continued easing could quickly shift the narrative away from further tightening and toward policy easing. That would seemingly require a more pronounced slowdown than that which the Fed has already baked into its projections, particularly given the consistent message from policymakers that they intend to hold rates higher for longer than many anticipate. To turn away from that could require greater downside risk and a meaningful shift away from the soft landing hopes that have grown in recent months.
The bottom line? Inflation pressures are still easing, but at a pace that continues to challenge consumers, particularly lower-income households that are particularly impacted by the pinch of rising prices. Just as those pressures took time to build, it appears likely that it will still take time for inflation to return to a range that’s more comfortable for consumers that had benefited from low, stable inflation for over a decade.
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