News & Press

MARKET UPDATE | August’s Inflation Print | September 2022

Published 09-13-2022


By: Candice Richardson and Sergio Dueñas

Headline inflation for August was 8.3% year over year, above consensus estimates. This was largely due to an increase in core Consumer Price Index (CPI), particularly rent and food. Headline CPI rose 0.1% month over month, and core CPI rose 0.6%. Within core CPI, core services increased 0.6%, while goods increased 0.5%, for strong increases in both categories. Goods inflation is coming off its near-record highs, as supply chain issues ease and the shift to services consumption continues. We can see the impact of this through the recent decline in shipping rates. Recent data shows that the cost to ship a 40-foot container from China to the West Coast in the U.S. is now down 72% from mid-January.

Within the inflation print, the biggest contributors to the increase came from the shelter, food, and medical care indexes. Gasoline prices posted a large decline, with prices falling 10.6% due to the release of the Strategic Petroleum Reserve. Despite this easing price pressures in oil, we don’t expect prices to keep declining, as the U.S. may begin refilling its emergency oil reserves. On the other hand, natural gas and electricity prices increased. Although the headline number declined from the previous month, 8.3% versus 8.5% in July, core CPI came in above expectations. Among other categories, new vehicles, household furnishings, personal care, and apparel increased. Some categories, including airline fares, communication, and used cars, declined.

The August inflation data was a surprise to the market even while headline inflation decreased from July year over year. We believe the more important inflation component is core CPI, as it excludes the more volatile items and is stickier. We expect inflation to remain higher for longer due to higher shelter costs, medical care costs, and food prices. While inflation remains high, inflation expectations have been coming down. Data from the University of Michigan Consumer Sentiment Survey for August showed that the median expected year-ahead inflation rate was 4.8%, down from 5.2% last month and at its lowest reading in eight months. Survey data from the New York Fed shows declining expectations as well. According to their survey that was released yesterday, expectations for U.S. inflation three years ahead fell to 2.8% in August, down from 3.2% the previous month and 3.6% in June. We should mention that expectations are just that, expectations, and consequently are poor predictors of the future. 

We are more interested in core CPI, as this number could remain higher for longer. One of the most important categories is housing costs, which accounts for one-third of overall CPI. In the month of August, housing costs rose by 0.7% and now are sitting at 6.2% year over year. Looking at historic numbers, housing costs tend to remain higher for longer. Additionally, mortgage rates hit 5.89% in September, as the Fed kept raising rates, making it the highest level since 2008. The higher mortgage rate has caused a spillover effect in rental costs, as prospective homeowners are holding off on buying a house. As a result, the rent of shelter index continued to rise by 0.7% in August compared to 0.5% in July. The food index in general rose 11.4% year over year, and 0.8% month over month. The food-at-home index rose 13.5% year over year, the largest 12-month increase since March 1979. Medical care rose 5.4% year over year, and 0.7% month over month. This is an increase from last month’s number of 0.4% month over month. 

This recent inflation print supports our belief that the Fed will announce another 75 basis point (bp) hike next week. We also expect a 50bp hike for the next meeting, when previously 25bp was more likely. Inflation is high and has yet to experience a notable decline. Powell has made it clear that inflation is the Fed’s number one priority, and the higher-than-expected print will prompt the Fed to be more hawkish. Therefore, we are now predicting the Fed will continue to raise rates into 2023, as this month’s numbers showed that core CPI continues to remain stubbornly elevated. The market is now expecting a terminal rate at the end of 2022 to be 4% and expects the rate hike will peak in the middle of 2023 at around 4.25%-4.50%. With that, the market’s expectation of rate cut has been pushed further out.

Sources: Thomson Reuters Eikon and U.S Bureau of Labor Statistics

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