Annual inflation rose increased 0.6% from the prior month in August, the highest in twelve months pushed higher by gasoline prices on already strained household budgets. It was the most since inflation peaked at a four-decade high in June 2022. The cost-of-living crisis deepens as real wages continue to suffer, inflation-adjusted earnings rose 0.5% from a year earlier, a second month of decelerating earnings growth. Core CPI accelerated on a monthly basis for the first time since February, which leaves the door open to another Fed interest-rate hike this year.
Gasoline costs accounted for over half of the rise, and Americans also saw higher prices for essentials like car insurance and prescription drugs. Energy costs rose broadly with a 10.6% monthly increase in gasoline prices, the largest since March of last year. Utility costs and grocery prices also rose, but at the slowest annual pace in two years.
US August 2023 Highlights
CPI
- US CPI (M/M) Aug: 0.6% (exp 0.6%; prev 0.2%)
- US CPI (Y/Y) Aug: 3.7% (exp 3.6%; prev 3.2%)
Core inflation:
- US CPI Core (M/M) Aug: 0.3% (exp 0.2%; prev 0.2%)
- US CPI Core (Y/Y) Aug: 4.3% (exp 4.3%; prev 4.7%)
Real Earnings
- US Real Avg Weekly Earnings (Y/Y) Aug: 0.3% (prev 0.2%)
- US Real Avg Hourly Earnings (Y/Y) Aug: 0.5% (prev 1.1%)
Where the Prices Changed
- The index for gasoline was the largest contributor (10.6% vs 0.2% in July), accounting for over half of the increase. The energy index as a whole rose by 5.6%, accelerating from a 0.1% increase as all the major energy component indexes increased. A
- The shelter index (0.3% vs 0.4%), which rose for the 40th consecutive month.
- Food inflation was steady (at 0.2%), as a softer increase in cost for food at home (0.2% vs 0.3%) was offset by a further advance in prices of food away (0.3% vs 0.2%)
Price changes over last year (CPI report) …
- Oil prices have been on the rise in the previous two months, which coupled with base effects from last year, pushed the inflation higher.
- In August 2023, energy cost fell 3.6%, much less than a 12.5% drop in July, with prices declining at a smaller pace for fuel oil (-14.8% vs -26.5%) and gasoline (-3.3% vs -19.9%).
- Cost of transportation services (10.3% vs 9%) increased more.
- Inflation slowed for electricity prices (2.1% vs 3%), food (4.3% vs 4.9%), shelter (7.3% vs 7.7%), new vehicles (2.9% vs 3.5%) and apparel (3.1% vs 3.2%).
- Faster decreases were seen in cost for utility gas service (-16.5% vs -13.7%), medical services (-2.1% vs -1.5%) and used cars and trucks (-6.6% vs -5.6%).
It appears the surge in prices is over with supply chains mostly healed. Services inflation is the directional key with consumer demand having shifted back toward services from goods.
Lower spending on goods, ongoing improvement in supply chains and falling shipping costs should continue to ease price pressures in coming months. The deflationary pull from improved supply chains will lessen with order now largely restored at US factories and ports. However, there are many possible shifts with the multiple geopolitical powder kegs out there with Russia and China.
A reminder we are coming off June 2022 9.1% inflation rate which was the highest in four decades. CPI has moderated after resurging in August with aggressive Fed interest rate rises.
The new data also reflects an update to the weights of goods and services in the spending basket to capture changes in consumer preference. The Labor Department previously updated every two years but starting with January’s release will revise them annually.
Services Inflation Peaked?
- Services inflation in the United States eased for the seventh month to 5.40% year-on-year in August 2023, the lowest since April 2022, from 5.70% in the prior month.
Market Reaction (updated)
At Open:
- Dow +37.90 at 34683.89, Nasdaq +46.91 at 13820.53, S&P +10.25 at 4472.15
- The S&P 500 pulled back somewhat after failing to breach its 50-day moving average (4,480).
- The effect of higher jet Fuel: Airline stocks are underperforming today after Frontier Group (ULCC 5.68, -0.47, -7.7%), Spirit Airlines (SAVE 16.83, -0.44, -2.6%), and American Airlines (AAL 13.61, -0.49, -3.5%) warned about their Q3 outlook. The U.S. Global Jets ETF (JETS) is down 1.6%.
- On a related note, the S&P 500 industrial sector (-0.2%) and Dow Jones Transportation Average (-0.3%) are both relative underperforms, partially due to their weak airline components.
- Growth stocks are leading the market higher. The Russell 3000 Growth Index is up 0.4% and the Russell 3000 Value Index is up 0.1%.
- Semiconductors and mega caps continue to build up strength. The Vanguard Mega Cap Growth ETF (MGK) is up 0.6%, near its high of the day.
U.S. Treasuries complex fell to fresh lows in immediate reaction to the August CPI report, the market was quick to bounce off lows with shorter tenors leading while longer tenors remain a bit closer to their lows. .
Yields After CPI
- 2-yr: +2 bps to 5.02%
- 3-yr: +1 bp to 4.69%
- 5-yr: +1 bp to 4.42%
- 10-yr: +2 bps to 4.28%
- 30-yr: +2 bps to 4.36%
Yields Before CPI
- 2-yr: -1 bp to 4.99%
- 3-yr: -1 bp to 4.67%
- 5-yr: UNCH at 4.41%
- 10-yr: +2 bps to 4.28%
- 30-yr: +1 bp to 4.36%
In forex the USD is lower on the back of lower yields.
Shelter Costs Adding to Homeless
Shelter costs, the biggest services’ component and make up about a third of the overall CPI index.
- Shelter cost which accounts for over 30% of the total CPI basket, The shelter index (0.3% vs 0.4%), rose for the 40th consecutive month.
Rent Inflation
Rent Inflation in the United States decreased to 7.27 percent in August from 7.69 percent in July of 2023, registering the lowest reading in 9 months. s
Housing Utilities
Food Inflation Persistently High, But Falling
Food inflation in the United States fell further to a two-year low of 4.3% year-on-year in August 2023, from 4.9% in the prior month and a peak of 11.4% in August 2022. Prices slowed down for food at home (3% vs 3.6% in July) and food away from home (6.5% vs 7.1%). On a monthly basis, food prices went up by 0.2% in August, the same pace as in the previous month.
Transportation Inflation Persists
The effects of the coronavirus pandemic, then the supply crisis and throw in the Russian invasion of Ukraine on top have weighed on prices. Since many businesses closed and lockdowns were imposed, denting economic activity leaving the world vulnerable. A jump in commodities and material costs, coupled with supply constraints pushed producer prices up and some companies are passing those costs to clients.
“I’m making more money…But I don’t see it because I’m paying more money for stuff now.” Low-wage workers are getting sharp raises. Inflation is eating them up. via Greg Ip WSJ
From the Traders Community News Desk