Evening Brief – 09.13.23
Fed Not Done Yet
Following the July comeback in headline CPI, it was expected to increase further in August, owing to the spike in energy prices. The headline CPI rose 0.6%, as expected, but the year-on-year change increased to 3.7%, up from 3.2% last month and hotter than the 3.6% expected. This is the highest increase since June 2022.
There was a big 180-degree turn in airline fares, which rose 4.9% after plummeting 8.1% in each of the previous two months. But gasoline prices shot up 10.5% month-over-month and were clearly the largest contributor to the rise in consumer prices, accounting for over half of the increase, the BLS noted.
Core CPI, which excludes food and energy, rose 0.3% in August – more than the 0.2% expected. But the index declined to 4.3% from a year ago, as expected, from 4.7% this time last year.
Interestingly, transport beats out shelter for the first time as the largest driver of core CPI. As Bloomberg notes, “A re-rise in transport CPI would be a problem for stocks and bonds as it has been the primary driver of inflation’s fall over the last several months.”
Meanwhile, the FOMC’s new favorite inflation signal – Core Services CPI Ex-Shelter – rose 0.53% in August, which is the most since September 2022 and remains above 4% year-over-year.
For the FOMC, while they have been growing more optimistic that inflation can be tamed without a recession, the report may have complicated matters. While they are likely to overlook the increase in energy prices, the stubbornly high shelter component is still an issue, and improvements in other categories may cause them concern.
The larger improving economic picture may potentially support another rate increase — with the risk of sparking a downturn in the process.
The August CPI report did not change the single-digit odds of a rate hike later this month, but the odds for November did increase, albeit marginally to 42% from 40%.
A wider picture of above-trend economic growth, tight labor markets, and inflation rates that remain well above the Fed’s 2% target should support the view that the Fed’s job is not done.