Inflation saw no unexpected moves as the Iran war keeps the situation elevated, according to the latest data from the Bureau of Labor Statistics. With this month’s Consumer Price Index (CPI) a key indicator for the upcoming Federal Reserve meeting, all eyes are on price pressures, which are simultaneously weighing on household budgets.
The August CPI saw a 0.4% monthly increase, landing annual inflation at 3.4%. This is up from last month’s increase of 0.1%, but annual inflation remained unchanged month-over-month.
Overall, inflation in the CPI came in “as expected,” according to Realtor.com® Senior Economist Jake Krimmel. He noted with numbers coming in at expectations, in theory this means we “shouldn’t have learned anything new about the Fed’s rate decision.”
“Chairman Warsh and the FOMC are focused squarely on inflation, not labor, and with today’s report as the last inflation read before their September 16 meeting (the Fed’s preferred PCE inflation gauge won’t drop until September 30), the stakes this morning were always going to be high,” he continued.
The largest contributor to inflation in August was gasoline, as it has been several times before since the start of the Iran war. The gasoline index was up 3.9% month-to-month, which the report noted accounted for “over one third” of inflation’s monthly increase. The energy index also grew again, up 2.1%.
Over the past 12 months, the energy index has shot up 16.3%, which the report noted was due in large part to the gasoline index jumping 27.4% over the same period.
While a smaller increase, the shelter index also notably advanced 0.3% in August, after rising 0.1% in July.
Core inflation (all items without food and energy inflation) saw a 0.3% rise monthly, landing annual core inflation at 2.4%. Despite the advancement month-over-month, annual core inflation actually decreased slightly from the 2.5% seen last month.
Krimmel also noted that the CME FedWatch tool had the odds of a rate hike at 69.4% heading into the report, but jumped to 87% after the release (and after it crashed from overwhelming traffic).
However, while the predictive tools “seem rather convinced,” Krimmel said the report “may prove a bit of a Rorschach test for the FOMC itself, probably not shifting any priors on the Committee.”
“Warsh himself said at Jackson Hole, ‘We should not rely on isolated data points. Trends matter most.’ And although rate hikes next week still look more likely than not, today’s report won’t settle any debates in the Fed boardroom,” he explained.
As for the consumer angle, Krimmel noted that “all three consumer signals are pointing in the wrong direction,” meaning gas prices, goods prices and mortgage rates—all of which are currently up.
“For housing, that means the late-summer slowdown might turn into a September stall, with pending sales recently turning negative year over year and existing home sales hitting their annual low in August,” he said. “Regardless of how the CPI report influences next week’s Fed decision, households and the housing market need a path toward lower inflation—for purchasing power, consumer confidence, and lower mortgage rates next year.”
