The promised pull back in consumer prices never happened, CPI was resurgent in August. The market took the bait that the with the pullback in oil prices and gasoline CPI would be lower. Despite the gasoline noise inflation is uncomfortably high. US consumer inflation hit +8.3% y/y vs +8.1% expected. Core CPI rose to 6.3% y/y vs 6.1% expected and 5.9% prior. Yes, energy fell 5.0% vs -4.6% prior with Gasoline -10.6% m/m vs -7.7% prior. That’s where the good news ended with rent +0.7% m/m vs +0.6% prior, food +0.8% vs +1.1%, +1.5% m/m in electricity and +3.5% m/m rise in natural gas prices adding to cost of living.
The misguided belief that the Fed would pivot, even though they said they wouldn’t saw stock markets rally strongly past few days, punters being punters. Within seconds that was eroded with the knowledge that politicians and bankers had no clue, was that a surprise?
Stock markets collapsed as the Bond market warned yesterday with a weak 10-year auction. CPI in August rose m/m +1.0% m/m vs -0.1% expected and +0.0% prior. Core CPI rose +0.6% m/m vs +0.3% expected and +0.3% prior.
S&P 500 futures were down 92 points after the number to 4018, or 2.3%. They were up around 0.5% just before the CPI data. The US dollar soared USD/JPY was at a session low 141.85 ahead of the number, it soared up 160 pips after the release to 144.49. US Power Prices Rise Most in 41 Years and biggest jump in US rents since 1991.
US interest rate Futures suggest 100 bps next week is now on the table. The implied odds of 100 bps are up to 23% from zero before the data. The terminal rate is showing 4.20% in March now from about 4.00% beforehand.
Treasury yields moved sharply higher immediately after the CPI release. US 2-year yields are up 12 bps to 3.69%, which is a new cycle high.
Clearly, the war is hardly won against high prices. The Fed is likely to want further evidence of an inflation slowdown at a July 27 news conference, Fed Chairman Powell said another 0.75-point rate rise could be on the table at the September meeting but would “depend on the data we get between now and then.”
Increases in the cost of food, electricity and shelter were the largest contributors again to the monthly rise, the Labor Department said
US August 2022 Highlights
CPI
- US CPI (M/M) Aug: 0.1% (est -0.1%; prev 0.0%)
- US CPI (Y/Y) Aug: 8.3% (est 8.1%; prev 8.5%)
- The food index was up 0.8% month-over-month, the smallest increase since December 2021, but it was up 11.4% year-over-year, which is the largest 12-month increase since the period ending May 1979.
- The energy index declined 5.0% month-over-month and was up “only” 23.8% year-over-year, versus 32.9% in July.
- The shelter index increased 0.7% month-over-month, led by a 0.7% increase in the index for owner’s equivalent rent of residences, and was up 6.2% year-over-year. The shelter index accounted for about 40% of the total increase in core CPI.
- Take food, energy, and shelter out of the CPI mix, and you still see an index that is up 6.4% year-over-year.
Core inflation:
- US CPI Core (M/M) Aug: 0.6% (est 0.3%; prev 0.3%)
- US CPI Core (Y/Y) Aug: 6.3% (est 6.1%; prev 5.9%)
Real Earnings
- US Real Avg Hourly Earning (Y/Y) Aug: -2.8% (prev -3.0%)
- US Real Avg Weekly Earning (Y/Y) Aug: -3.4% (prev -3.6%)
Real weekly earnings are down for a record 16th consecutive month. Inflation-adjusted earnings have declined for 89% (16 of 18 months).
Many analysts had expected March, clearly, they have been mistaken to mark the inflation peak although the war in Ukraine is far from over, supply chain bottlenecks persist, and consumer demand remains elevated which is likely to weigh on the CPI.
Monthly Price Increases
- CPI energy -4.6% vs +7.5% prior
- Gasoline -7.7% vs +11.2% prior
- New vehicles +0.6% vs +0.7% prior
- Used vehicles -0.4% vs +1.6% m/m prior
- Owners’ equivalent rent +0.6% m/m vs +0.6% prior
- Food +1.1% vs +1.0% prior
Yearly Price Increases
- Energy index increased 23.8%, below 32.9% in July. Smaller increases were reported for gasoline costs (25.6% vs 44%) and fuel oil (68.8% vs 75.6%) while inflation sped up for natural gas (33% vs 30.5%) and electricity (15.8%, the highest since August 1981).
- Inflation rose for food (11.4%, the most since 1979), shelter (6.2%, the most since 1984), and used cars and trucks (7.8%).
The hope was the slowdown in April was a sign that inflation had probably peaked, the inflation is unlikely to fall to pre-pandemic levels any time soon and will remain above the Fed’s 2% target for a long time as supply disruptions persist and energy and food prices remain elevated.
US CPI August 2022
Core Inflation y/y
Food
Food inflation in the United States accelerated for a 15th straight month to 11.4% in August, the highest since May of 1979. Cost of food at home (16.7%), cereals and bakery products (16.4%), fruits and vegetables (9.4%) and dairy and related (16.2%) recording the highest increases.
Housing Utilities
Transportation
US Core CPI July 2022
Owners’ equivalent rent portion of CPI, fastest gain since June 1990
Energy component of August CPI fell by 5% m/m, largest contraction since April 2020
The effects of the coronavirus pandemic, then the supply crisis and throw in the Russian invasion of Ukraine on top have been weighing on prices. Since last year 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