Consumer Price Inflation for the 12 months ending August 2023 accelerated to 3.7% driven primary by rising energy costs and related services. However, the Federal Reserve prefers to strip out food and energy costs, on this metric inflation declined to 4.3%, continuing the disinflation trend in this version of the series since March 2023. That’s still well above the Fed’s 2% annual inflation target. The monthly inflation rate for August 2023 was 0.6% for headline inflation and 0.3% stripping out food and energy.
The Fed will take some encouragement from some underlying trends in the CPI report, such as continued disinflation in shelter costs. That said the Fed may still be tempted to consider a further 2023 interest rate hike, perhaps in November, to bring inflation down to their 2% goal faster. There will be another CPI report before the Fed makes any decision there, with the Fed’s upcoming September 20 decision largely expected to hold rates steady both according to recent statements from Fed officials and the implicit forecast of interest rate futures.
Rising Energy Prices
Higher energy costs accounts for the headline inflation numbers accelerating as energy commodities rose over 10% for the month of August. This trend likely prompted the increase in prices for energy intensive categories such as transportation services and airline fares too. It remains to be seen whether this trend continues for the full month of September. For now, energy costs are generally rising in September as well, though we’re not yet halfway through the month so price trends could change.
Home Price Disinflation
Shelter costs continued to increase in the August CPI data, but at a slower rate than previously. This will offer some comfort to the Fed. Still, this trend is largely expected based on past home price moves.
Shelter costs are particularly important to CPI given the large weighting applied to this category. If this trend continues, it may help pull inflation lower. However, shelter costs typically track home prices with a lag. Here the Fed has expressed concern that home prices, despite declining in late 2022 and early 2023, have rebounded in aggregate since the spring so this favorable trend that’s helping bring down core inflation may not last.
Overall data on services prices in the August CPI numbers will give the Fed some concerns. Many categories are volatile month-to-month, but both medical and transportation services did increase in price compared to recent months. The Fed is monitoring this category closely and this recent month of data didn’t show much disinflation, even though prior months were more encouraging.
Upcoming Fed Meetings
The Fed has largely ruled out a rate increase at their next decision on September 20, but an interest rate hike on November 1 remains under consideration, with the bond markets assessing the chance of a November hike at almost 40%.
There’s still more data to come before that meeting, including another CPI report. The August CPI figures, suggest that inflation will continue to take some time to return to the Fed’s 2% target. It remains to be seen how much patience the Fed has for that. Now the Fed may have to weigh the risks from a potentially weakening jobs market against its inflation fight, which could complicate their decision further.