Energy and Food Costs Soar

The consumer price index (CPI) rose 0.4% in September, slightly above market expectations on the heels of surging prices at the gas pump, grocery stores and restaurants. Brace for even higher energy prices in October when temperatures drop and consumers heat their homes.

Overall inflation rose 5.4% from a year ago, higher than we saw in August. That is higher than when we met a peak in the spring and early summer with the onset of reopening. The September increase will determine the rise in social security payments next year; it is the largest increase for those on social security since 1990 after Iraq invaded Kuwait and oil prices spiked.

Core (excluding food and energy) prices edged up 0.2% and rose 4% from a year ago, the same as last month. A Delta-variant driven drop in hotel room rates, airfares, rental car rates and haircuts was offset by a pickup in shelter costs. Rents and owner’s equivalent rents (which lag increases in home values) both accelerated in September. Another month or two of modest gains in those rents will push shelter costs up faster than we saw before the onset of the pandemic.

The pickup in shelter costs is important because it will dampen the slowdown in prices that is expected as supply chain bottlenecks are resolved; it will also raise red flags for the Federal Reserve. Shelter costs alone account for one third of the CPI. It is toxic, especially for low-wage workers. The surge in gasoline and food prices alone has nearly wiped out the jump in wages for the lowest paid workers over the last two years.

Commuting costs are undermining efforts by workers to search for jobs farther from where they live. This happened when oil prices surged, coming out of the 2008-09 recession. Most businesses didn’t notice it because the demand for workers was still so weak.

We saw steep declines in apparel prices led by a drop in prices for suits and sport coats. Consumers who are returning to offices have swapped waist bands for stretch bands but are not dressing for success like they once did. That train left the station a long time ago; the pandemic is, for the moment, accelerating that shift. One colleague told me he hoped to never wear a tie again; I decided that back in the 1980s. (That dates me, I know.)

Used vehicle prices continued to recede but were still up nearly 40% from pre-pandemic levels. New vehicle prices are up 8.4% from pre-pandemic levels and still accelerating. New vehicle prices surged 8.7% from a year ago, the fastest pace since September 1980.

Separately, many of the base effects - a drop in many prices a year ago - have played out. The math gets easier on inflation figures as we move into 2022 but inflation is now expected to remain much more elevated for longer than previously expected. The trend in inflation is global in scope.

Bottom Line
Delta took a toll on many of the prices we saw jump at the onset of reopening. That will give some a sense of relief that the inflation we are enduring is transitory; that sentiment is premature. The surge in shelter costs will be longer lasting and get much worse in 2022. Rate hikes could come as soon as mid-year after the Fed finishes tapering its asset purchases It has been decades since the Fed has had to chase inflation.

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