The consumer price index jumped, as expected, in August, as gas prices revved higher, pushing up the headline inflation rate for a second straight month. The slightly unpleasant surprise came from a bigger-than-expected rise in core CPI inflation, which excludes prices for energy and groceries. The S&P 500 opened slightly higher on Wednesday after the CPI report, with further Fed rate hikes still unlikely.
CPI Inflation Report Hits And Misses
The consumer price index rose 0.6% on the month, matching forecasts.
The 12-month CPI inflation rate rose to 3.7% from 3.2% in July and 3% in June. Economists had expected the inflation rate to rise to 3.6%.
The core CPI rose 0.3% vs. July levels, above the 0.2% forecast. The annual core inflation rate eased to 4.3% from 4.7% in July, matching estimates. The core CPI inflation rate peaked at a 40-year-high 6.6% in September.
Core goods prices fell 0.1% on the month, lowering the 12-month change to just 0.2%. But core services prices rose 0.4% from July, while the 12-month change eased to 5.9% from 6.1% the prior month.
Fed Chair Jerome Powell has said that the most important category of spending for the inflation outlook is core nonhousing services, reported with the Commerce Department's late-month personal income and outlays data. Wall Street looks to the CPI gauge of services less rent of shelter as a reasonably close proxy, though it has serious shortcomings.
August's CPI report showed services less rent of shelter prices rose 0.5% on the month after rising 0.2% in July. Core services inflation excluding housing eased to 3.1% from 3.3% in July. The underlying trend may be slightly worse because the monthly data show a 3.6% drop in health insurance prices. But the CPI report's methodology focused on health insurer profits from the previous year doesn't yield a timely, useful data point.
Fed Policy Impact
After the CPI report, markets were pricing in just 3% odds of a quarter-point Fed rate hike at next week's meeting. Odds of a rate hike by the Nov. 1 meeting stand at 42%, a touch lower than before the CPI.
Surging energy prices in 2022 seemed to fuel inflation throughout the economy, when wage growth was still hot and households still had a big stash of savings left over from the pandemic. But now higher oil prices are less of a worry for the Fed because they're more likely to squeeze other household spending.
Thursday's retail sales report for August could provide a degree of confirmation that gas prices are weighing on discretionary spending.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, strongly suspects an additional reason why spending is softening: renewed student loan payments.
The Supreme Court struck down President Joe Biden's student loan forgiveness plan in late June, weeks after Congress and the White House agreed to end the three-year moratorium on monthly payments for about $1.7 trillion in federal student loans.
The first payments don't come due until October, but borrowers have surprisingly gotten a big head start. Over the past five weeks, funds flowing to the Department of Education have run at an annualized $78 billion rate above year-ago levels.
Other near-term risks to growth come from a potential government shutdown when the fiscal year begins in October and a United Auto Workers strike that could happen this week.
S&P 500 Reaction To CPI Report
After the CPI report, the S&P 500 rose 0.3% in volatile early Wednesday stock market action, while the 10-year Treasury yield rose 2 basis points to 4.28%.
On Tuesday, the S&P 500 slipped 0.6% to fall below its 50-day moving average. That will be a yellow flag for the current stock market rally until the S&P 500 can reclaim that level.
Be sure to read IBD's The Big Picture every day to stay in sync with the market direction and what it means for your trading decisions.
CPI Report Details
Energy prices rose 5.6% on the month but are down 3.6% from a year ago.
Prices for food served at home rose 0.2% vs. July. The 12-month inflation rate eased to 4.3%.
Food away from home prices, which tend to be more affected by labor costs, rose 0.3% on the month and 6.5% from a year ago.
The CPI report showed used car prices falling 1.2% on the month and 6.6% from a year ago. New vehicle prices rose 0.3% on the month and 2.9% from a year ago.
Apparel prices rose 0.2% and are now up 3.1% from a year ago.
Transportation services prices jumped 2%, lifting the annual increase to 10.3%. That reflected a 4.9% monthly rise in airfares and 2.4% increase in auto insurance.
Prices for shelter rose 0.3% from July and 7.3% from August 2022.
