The consumer price index (CPI) data for August came in stronger than expected, fueled by mounting food and shelter costs, despite a slight drop in gasoline prices, according to the Bureau of Labor Statistics (BLS).
The CPI, which serves as a key inflation gauge, showed that consumer prices rose 0.1% in August on a monthly basis, while analysts were expecting a 0.1% drop. Inflation increased 8.3% on a year-over-year basis, above the consensus estimates of 8.1%.
Core inflation, which excludes erratic food and gasoline prices, surged 0.6% month-on-month and 6.3% from the same month last year. Analysts expected core CPI to increase by 0.3% and 6%, respectively.
Surging Prices ‘Refuse’ To Cool Down
Inflation rose more than anticipated in August despite a 5% drop in energy prices for the month after the gasoline index tumbled by 10.6%. While rampant energy costs remain one of the key drivers of inflation, the pullback in gas prices was offset by surging food and shelter costs.
The report showed that the food index climbed 0.8% in August, while shelter costs increased by 0.7% month-over-month and 6.2% relative to August 2021. On a more positive note, the slump in gas prices was warmly welcomed by consumers as higher food prices are mainly fueled by rampant transportation costs. The national average price of regular gasoline stood at $3.71 per gallon on Tuesday, down 26% from the peak reached in June.
Ryan Sweet, senior director of economic research at Moody’s Analytics, said:
“Consumers are getting relief at the pump, and there should be further relief coming at the gasoline station and the grocery store since one of the highest costs of food is transporting it.”
In response to today’s CPI report, the S&P 500 dropped over 3% to return trading below 4000, showing a significant slowdown in investment activity. Tech-heavy NASDAQ index trades over 4% lower and is on course to record one of the biggest daily declines in recent months. On the other hand, the dollar index is surging to now completely erase losses from Friday and Monday.
Forget About The Fed Pivot Anytime Soon
Despite a slight drop in consumer prices since June, inflation remains a far cry from the Federal Reserve’s 2% target. Inflationary pressures persist, forcing the U.S. central bank to cling to its hawkish monetary policy and continue hiking interest rates.
Although inflationary dynamics are improving, prices remain too high for consumers and the Fed to become comfortable. The market is pricing in the third consecutive 75 basis points interest rate hike at the Fed meeting next week.
In his speech at the Jackson Hole annual conference late last month, Powell said rate increases would reduce inflation but would also “bring some pain to households and businesses.”
The U.S. central bank has hiked interest rates four times so far in 2022 to a total of 2.25 percentage points. Тоday’s inflation data was not expected to significantly impact the Fed’s policy meeting this week as the Fed has likely already decided its course of action. Instead, the data will play a more important role in the Fed’s policy decisions through the end of 2022 and at the start of 2023.
Mike Loewengart, Managing Director at Morgan Stanley, said:
“Today’s CPI reading is a stark reminder of the long road we have until inflation is back down to earth. Wishful expectations that we are on a downward trajectory and the Fed will lay off the gas may have been a bit premature.”
The U.S. economy has faced significant headwinds in the past eight months after recording its best year in almost four decades. Inflation has notably impeded the growth of the U.S. economy, with the gross domestic product (GDP) shrinking in the previous two quarters.
This occurrence was historically considered a sign of recession. The GDP is expected to rise just 1.3% in the third quarter on a yearly basis, as per Atlanta Fed.