Inflation Still Running Hot

The consumer price index (CPI) rose 0.3% in August from July, a bit cooler than market expectations. Food and gasoline prices continued to move up but at a more moderate pace. The price of meat alone is up more than 12% from a year ago, which is eating into consumer pocket books along with gas prices. The cost of dining out moderated with a pull back in spending at restaurants but remained nearly 5% above year ago levels.

The two-year change in food and gasoline prices - 8% and nearly 19% respectively - essentially swamps the big move up we have seen in wages over the same period. Many low-wage workers are actually losing ground, given the surge in commuting costs.

Energy prices are expected to move even higher given the damage to refining facilities following Hurricane Ida. That ups the commuting costs for low-wage workers who cannot work from home.

Core CPI (excluding food and energy) edged up 0.1% in August and moderated to a 4% annual pace. A drop in airfares, hotel room rates and rental cars tempered gains in just about everything related to housing and new vehicles. Vehicle insurance costs also moderated after surging earlier in the year. The index for furniture, bedding and appliances all accelerated during the month. Used vehicle prices fell but remained more than 30% above year ago levels.

New vehicle prices jumped 1.2% in August and were up a whopping 7.6% from a year ago. That marks the fastest pace of inflation for new vehicles since former Federal Reserve Chairman Paul Volcker was working to break the back of inflation in 1981. Shortages of dealer inventories are so acute that some smaller dealerships are worried about going out of business. They can’t carry the costs of overhead without the vehicles to sell.

Shelter costs, which account for more than a third of the CPI, decelerated to a 0.2% pace in August, mostly because of a drop in hotel room rates. Rents and owner’s equivalent rents are moving up after decelerating earlier in the cycle.

The CPI does not directly measure home price appreciation, as that represents a change in asset values as opposed to costs. The upward pressure seeps into the CPI via the owner’s equivalent rent component, which asks home owners what they would rent their homes for, excluding utilities. A surge in mortgage refinancing helped to suppress those estimates even as home prices surged with the shift to work from home. This is an area we will be watching as it could become more of a problem for consumers and the Federal Reserve as we move into 2022.

Bottom Line
Inflation has begun to show signs of cooling in response to the Delta variant but the level of prices remains extremely elevated, especially for big-ticket items. The basics of food and energy costs are also elevated, which is crimping consumer budgets. The Fed will take more solace in the cooling than most consumers.

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