CPI Report: Key Insights into U.S. Inflation

Posted by Jeffrey J. Roach, PhD, Chief Economist

Additional content provided by Colby Hesson, Analyst

Key Takeaway: The rise in gas prices in August was the largest contributor to headline inflation and will not likely show up again next month. Annual core inflation decelerated to 4.3% in August from 4.7% the previous month.

Highlights from the August Consumer Price Index (CPI) Report:

The rise in gas prices accounted for over half of the increase in consumer inflation but will not likely contribute in the same way next month.
Prices for hotels, used vehicles, and recreation all declined in August.
The decline in prices for lodging away from home could indicate consumer demand is starting to wane on travel-related services.
Consumer inflation excluding housing was up 1.9% from a year ago, illustrating that one nagging component to inflation is shelter.

Bottom Line: Markets will likely look past the rise in headline inflation since the largest contributor will not likely be a main factor next month. Core inflation rose 4.3% from a year ago and will continue to decelerate as rent prices are expected to slow in the coming months. Yields on the 2-year Treasury are trading below yesterday’s close, indicating that markets are taking the latest inflation report in stride as the Federal Reserve (Fed) is expected to keep rates unchanged at its upcoming meeting.

The August CPI data provides an updated view of the inflation situation in the United States. While certain components of the report indicate inflation is slowing, there are underlying variables that continue to influence the total rate. According to the August CPI report, consumer prices rose by 3.7% year over year, a minor increase from the 3.2% annual rate recorded in July. Although this is a reduction from the high levels seen in 2022, it
is crucial to remember that inflation remains considerably above the Fed’s 2% target.

Gasoline Prices and Headline Inflation

The large rise in fuel costs is a key factor in the headline inflation highlighted by the August CPI report. This surge was the main driver of headline inflation for the month. Although gas prices were significant this month, their impact is not anticipated to be as strong in the following months. In the past, the CPI’s volatile component of gasoline price changes has been the response of prices to a variety of circumstances, such as geopolitical events and supply and demand dynamics. Future CPI reports are likely to reflect other inflationary factors.

Deceleration in Core Inflation

The August figures reveal several noteworthy trends, one of which is the apparent slowdown in annual core inflation. This measure dropped to 4.3% from 4.7% in the previous month, showing a moderating trend in core inflation rates. Core inflation excludes the volatile components of food and energy, providing a more stable gauge of price movements in the economy. This moderation in core inflation could be attributed to several factors, including changes in consumer spending patterns and supply chain dynamics. Core inflation must be regularly monitored because it is a major factor in the Fed’s monetary policy choices. The Fed’s attitude toward interest rates may change if core inflation continues to decline over time.

Insights from the August CPI Report

In August, we saw price declines in a number of industries, including lodging, pre-owned cars, and leisure. These price reductions are an indication of changing consumer demand and spending habits. For instance, decreased hotel rates can be a sign of altered travel habits or increasing competition among hotels. These patterns highlight how consumer tastes and the overall economic environment are always changing.

A potential fall in consumer demand for travel-related services may be indicated by the decline in costs for staying away from home, such as hotels. Certain businesses, such as hospitality and tourism, will be impacted by this changing consumer behavior. Businesses in these sectors may need to adapt to changing consumer preferences and pricing dynamics.

When excluding housing-related costs, consumer inflation showed a 1.9% increase from a year ago. This underscores that one persistent component of inflation is associated with shelter-related expenses. Housing costs, including rent and mortgage payments, continue to be a significant driver of overall inflation. Understanding and controlling inflation still heavily depends on how the property market behaves. We have updated our Inflation Dashboard, designed to provide a snapshot of the inflationary environment, with the latest CPI data.

Market Implications

The main lesson is that the financial markets will probably perceive the increase in headline inflation in a nuanced manner. Although the spike in gas prices made a major contribution this month, it is not anticipated to play as much of a role in subsequent reports. Markets are forward-looking, and when making decisions, investors are likely to take the changing nature of the inflation drivers into account.

Given the anticipated reduction in rent price increases in the upcoming months, core inflation, which increased 4.3% from a year ago, is anticipated to continue slowing. In order to inform its monetary policy decisions, the Fed constantly tracks core inflation. Core inflation slowing down could affect the Fed’s stance on interest rates and other policy instruments.

Market Response

Currently, yields on the 2-year Treasury are trading below yesterday’s close. This suggests financial markets are reacting calmly to the latest inflation report. This response is in line with the expectation that, given the changing economic environment, the Fed will probably decide to keep the existing interest rates at its next meeting. Market participants are evaluating the facts in the larger context of prevailing economic circumstances and monetary policy.

Conclusion

While the August CPI report shows promising signs of inflation slowing, it is critical to recognize that inflation rates continue to be higher than the Fed’s target. This places the central bank in a tricky situation that calls for constant attention and careful policy choices. Despite the fact that the CPI data appears to be improving, another rate increase this year is still possible, although not our baseline expectation. Although we expect the Fed to take a break during its meeting in September, the meeting in November still needs to address a number of issues. Investors are likely to find plenty of opportunities in this changing market environment, despite the continuing difficulties caused by inflation.

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