The August CPI Report: Good News for Energy Costs, but Keep an Eye on Food and Housing
The upcoming CPI Report for August could potentially have good news, as energy costs may fall - similar to the previous positive release. However, food and housing costs are the components to keep an eye on.
The Consumer Price Index (CPI) is one of the most important indicators of inflation and economic activity. The report for the month of August is eagerly awaited by financial markets as it will give insight into the direction of the economy.
Inflation is something that is being closely watched by many people currently. This is because inflation has prompted much higher interest rates. Additionally, Fed Chair Powell made it clear in an August speech that the Fed is unlikely to ease up on rate hikes until they are very confident that U.S. inflation is well under control. This is a very important issue because even the positive report for CPI in July was insufficient to give the Fed confidence that inflation was fully under control.
The upcoming CPI report is likely to show that inflation is picking up, which could prompt the Fed to raise interest rates by around 50 to 75bps at their next meeting. However, the data may also show that inflation is not as much of a concern as it was in the past, which could lead the Fed to hold off on raising rates for now. In either case, the data from the CPI report will be closely watched by the Fed in the coming months as they make decisions on interest rates.
July sees improvement in key areas
July's inflation data was encouraging, with falling energy prices leading to the lowest month-on-month inflation reading since the current U.S. inflation surge began. Inflation was flat month-on-month, which is good news for consumers.
It is good news that inflation has dipped slightly in the US, but there are still some concerns. Housing and food costs continue to rise, and together they make up almost half of the US inflation rate. This means that we will be closely watching the CPI release for September, which covers the month of August.
It is a particular problem because rises in food costs are felt disproportionately by lower income households.
Looking at recent months of CPI data, it is hard to say that food price inflation has slowed at all. Any slowdown in food price inflation in the upcoming report would be welcome, but is not guaranteed. The dramatic rise in food costs is perhaps the biggest concern the Fed can point to at the moment as it looks at recent inflation data. Food carries a material weight in the CPI index and its price is rising fast in 2022.
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There is a disconnect between the shelter costs reported by the CPI and those suggested by other housing and rental indices. Housing costs have been rising more slowly than food costs, but the CPI has shelter costs rising at a slower pace than industry benchmarks. This means that it is unclear if the shelter index in the CPI will rise to catch up with other housing and rental indices, or if it may start to soften as concerns in the housing market grow. In recent months, shelter costs have been rising more slowly in CPI data, but still faster than the Fed would like. This is a important issue to watch, as shelter costs are the largest single category weight in the CPI index.
August Data: Monthly Summary
With gasoline prices falling sharply in August, it is likely that the CPI data for the month will show another subdued month-on-month inflation number, similar to July. This is according to EIA data.
The Fed will closely monitor moves in food and housing prices for signs that underlying inflation is easing. However, swings in energy prices may not be enough to move the needle on inflation.
Looking beyond the headline inflation numbers, the Federal Reserve and financial markets will be closely watching trends in sub-components like food and housing costs. If those series continue to rise sharply, the Fed may be hesitant to dial back on interest rate hikes, even if the headline CPI number looks good on a month-on-month basis.