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Date: September 15, 2023
August consumer price data delivered a significant surprise to markets on Friday, as core inflation—excluding volatile food and energy—climbed 0.3% from July, surpassing economists' expectations of a 0.2% increase. The Labor Department's report sent bond yields higher and pushed the odds of a Federal Reserve rate hike at next week's policy meeting above 40%, according to the CME FedWatch Tool, up from 37% the day prior.
Headline consumer prices rose 0.4% month-over-month, fueled primarily by a 3.9% jump in gasoline prices, which accounted for more than one-third of the overall monthly increase. Year-over-year, the all-items CPI stood at 3.4%, unchanged from July's annual pace.
Core goods prices—excluding food and energy—rose 0.1% for the month and remain up 0.7% from a year ago. Core services, a closely watched component that excludes energy services, increased 0.3% in August and are now 3.0% higher compared to the same period last year. Shelter costs, which make up about a third of the CPI basket, rose 0.3% monthly and 3.0% annually, continuing to provide upward pressure on services inflation.
Food prices showed mixed signals. Grocery costs held steady from July and are up 2.2% over the past 12 months, while dining-out prices rose 0.3% monthly and 3.4% annually. Energy aside from gasoline saw some relief: electricity prices declined 0.2% in August, marking the second drop in three months, though they remain 3.8% higher year-over-year.
Healthcare costs softened. Medical care services fell 0.2% month-over-month but are up 2.5% from a year ago. Prescription drug prices were flat after two months of declines, and non-prescription drug prices dropped 1.0%—their second consecutive monthly decrease—leaving them 2.0% lower year-over-year.
Durable goods prices were a bright spot for consumers. Major appliance prices jumped 1.4% in August after declining the prior two months, but are still down 1.9% from a year ago. Furniture prices fell 0.9% monthly and are 0.8% lower than in August 2022. New vehicle prices rose 0.3% from July (up 0.6% year-over-year), while used car and truck prices edged up 0.4% for the second month in a row, though they remain 2.3% below year-ago levels.
Apparel prices were unchanged in August, following a 0.1% rise in July and a 0.6% drop in June. Year-over-year, clothing costs are 3.6% higher.
The August CPI report reinforces the narrative that inflation remains stubbornly above the Fed's 2% target, particularly in the services sector. With core inflation running hotter than anticipated, investors now assign a 45% probability to a 25-basis-point rate hike at the September 19–20 FOMC meeting, according to the CME FedWatch Tool. Economists at Goldman Sachs noted that while gasoline is temporary, the persistence in core services could tip the Fed toward an additional move.
"The data keeps a September hike clearly on the table," said James Bullard, former St. Louis Fed president now at Purdue University, in a post on social media. "The labor market remains tight, and there's still no clear sign that services inflation is decelerating enough."
Some analysts, however, caution against reading too much into one monthly reading. "Core inflation is still trending downward on a year-over-year basis—2.4% in August versus 2.5% in July," pointed out Sarah House, senior economist at Wells Fargo. "The Fed will weigh this report alongside the upcoming producer price index and retail sales data before making a final call."
Looking ahead, the Federal Reserve will have its last chance to project the path of rates with the release of the Summary of Economic Projections on September 20. The August CPI data likely narrows the debate to a choice between a hold and a hike, with the odds now tilted toward tightening.
For consumers, the immediate impact of higher gasoline and shelter costs continues to strain household budgets. While headline inflation has moderated from its 9.1% peak in June 2022, the monthly core reading serves as a reminder that the final leg of the inflation battle may prove the toughest.
