The August inflation report – released Sept. 13 – was supposed to be proof that US fiscal and monetary policymakers were triumphing over a surging consumer price index (CPI). Instead, the latest economic data offered more questions than answers. Has inflation peaked? Is the Federal Reserve effectively killing demand? How much more pain – as Fed Chair Jerome Powell famously uttered in Wyoming – will low- and middle-income Americans endure in today’s climate of elevated inflation and rising interest rates? Whatever the responses, it is certainly premature to declare mission accomplished when it comes to reducing prices.
August Inflation Data Sizzle
The US annual inflation rate eased to 8.3% last month, down from 8.5% in July. It was a bittersweet dip as economists had projected a reading of 8.1%. But here was the kicker inside the Bureau of Labor Statistics (BLS) report: The core inflation rate, which eliminates the volatile energy and food sectors, climbed to 6.3%, topping the market estimate of 6.1% and the July print of 5.9%. Even on a month-over-month basis, the August inflation figures were higher. The CPI edged up 0.1%, while the core inflation rate doubled to 0.6%.
The theme of the monthly cost-of-living snapshot was the significant increase in food and shelter costs.
Shelter prices jumped 6.2% during the 12 months ending in August. BLS figures show that the food index climbed 11.4%, with food at home and food away from home surging 13.5% and 8%, respectively. From July to August, the food index rose 1.1%. Within the report, here is a look at how much more consumers had to pay compared to the same time last year:
- Bread: +16.2%
- Uncooked ground beef: +7.8%
- Ham: +9.2%
- Chicken: +16.6%
- Eggs: +39.8%
- Milk: +17%
- Fruits and vegetables: +9.4%
- Coffee: +18.7%
- Butter: +24.6%
As broad-based inflation statistics show that prices were mostly up across the board, whether year-over-year or month-over-month, the silver lining was that energy continues to trend downward. The index fell 5% on a monthly basis, with fuel oil dropping 5.9%, gasoline sliding 10.6%, and propane and kerosene dipping 0.9%. But electricity costs still swelled 1.5%, and utility gas service jumped 3.5%.
Remember when the White House said that energy accounted for much of the inflation in America today? It certainly dropped the ball – again – on that notion.
But while everyone was seemingly disappointed by the worse-than-expected numbers, President Joe Biden said in a post-CPI statement that the data show “more progress in bringing global inflation down in the US economy.”
“Overall, prices have been essentially flat in our country these last two months: that is welcome news for American families, with more work still to do,” he stated. “It will take more time and resolve to bring inflation down, which is why we passed the Inflation Reduction Act to lower the cost of health care, prescription drugs and energy. And my economic plan is showing that, as we bring prices down, we are creating good paying jobs and bringing manufacturing back to America.”
Inflation Tanks the Market
The US financial markets tanked on the news as the leading benchmark indexes plummeted after the data in pre-market trading. The Dow Jones Industrial Average lost nearly 600 points, the S&P 500 slid more than 2%, and the Nasdaq Composite Index declined by nearly 400 points. The US Treasury market popped, with the ten-year yield up 8.3 basis points to 3.447%. But the recession-indicating spread between the two- and ten-year yields widened again to -30 basis points. The US Dollar Index (DXY), which gauges the greenback against a basket of currencies, soared more than 1% to around 109.50.
Why did the BLS spook investors? Blame the Federal Reserve. Traders are worried that the US central bank will accelerate its quantitative tightening (QT) campaign and turn ultra-hawkish, which could happen as early as the September Federal Open Market Committee (FOMC) policy meeting. Although occupants inside the Eccles Building have routinely conveyed that they will raise interest rates for as long as it takes, investors keep deluding themselves anytime there is a hint of easing of price inflation and putrid economic data. “We are in this for as long as it takes to get inflation down,” Fed Vice Chair Lael Brainard recently told a banking conference in New York.
The Fed’s objective is to bring the CPI or the personal consumption expenditures (PCE) price index down to below 3% in 2023 and 2024. If the numbers confirm that lower inflation is occurring at a snail’s pace, Powell and Co. might put the pedal to the metal and trigger a sharp economic downturn. Whatever strategy the Fed employs, people will suffer from price instability or a recession.
For now, the discussion on Wall Street might not be about the United States reaching peak inflation. Instead, the debate among the bulls and the bears will be about inflation coming down fast enough before it exhausts the economy.
Liberty Nation recently reported that the marketplace is showing signs of deflation, particularly in the retail sector. Bloated inventories are forcing companies to sell their outdated stock, giving shoppers some relief from sky-high prices. However, considering what the numbers inside the August inflation report showed, a 25% discount on T-shirts and toasters may not be enough to trim the CPI. After several months of tightening, officials in the nation’s capital, who were late to the party, are clearly not doing enough. As a result, inflation is now entrenched in the market, becoming a permanent fixture of the US economic landscape. At this stage of the cycle, Powell must pull a Paul Volcker and go scorched earth on monetary policy by jacking up the fed funds rate and slashing the money supply. But this is bitter medicine that the adults who should know better keep postponing.