Long Live the Inflation King
It feels like inflation has become a character of its own, living in a very expensive house, driving overpriced used cars, and constantly debating whether it’s cheaper to drive or fly to far away lands. This month’s CPI report tells me that the inflation king remains in power.
Depending on who you ask, August inflation was either a positive sign or a worrying sign. If we look at the chart below, over the period since last summer when CPI peaked at 9.1% year-over-year, it’s been on a swift downward slope. But that pesky dotted gray line that represents “all items” recently turned back upward on a year-over-year basis, and has been rising for the last two readings. This month came in at 3.7% y/y versus the expectation of 3.6% and the prior month’s 3.2%.
If I’m following along, that’s moving in the wrong direction…
Here’s where it gets fun to insert all of the explanations why a rising headline number doesn’t matter, such as: core CPI is trending down, the pace of food price increases is down, used car prices are down, and on a year-over-year basis energy prices are lower.
Those are all positive pieces of the puzzle, but they gloss over the remaining, or even new, negatives. The month-over-month CPI reading was +0.6%, the highest it has been since June 2022 when inflation peaked. The big drivers there were rising energy prices and higher transportation costs.
Core CPI trending downward could mean the Fed may lay off the hiking button, but it doesn’t mean the consumer isn’t still getting hit by higher prices. Core removes food and energy from the equation, but consumers can’t remove food and energy from their lives.
Stop me if you’ve heard this before, the U.S. consumer makes up nearly 70% of our economy. If the consumer is under stress, it’s only a matter of time before the economy is under stress. So far, a stressed consumer has not shown up in the economic growth data, but more than two years of inflation well above target is likely to cause repercussions on spending and credit.
Supercore to the Rescue! Not.
This cycle, the Fed came up with a new inflation measurement called ‘the supercore’, which is core services ex-shelter. I can barely type that with a straight face because it sounds to me like, “if we remove everything that’s a problem, the number will look much better.”
Ok, so now we take shelter out of the equation and say as long as this metric is going down, we’re in good shape. Again, this feels a bit misguided since consumers also cannot remove shelter costs from their lives.
The intention – I think – of the supercore reading was for the Fed to identify the economy’s underlying inflation level, the stuff that would be sticky and less affected by transient forces. Here’s that metric in chart form — it’s a little jumpy month-to-month, but it’s clear that the August reading is considerably higher than the June and July readings. Another metric that’s moving in the wrong direction.
This one was also very affected by transportation costs, mostly airline fares. I guess it’s a good thing used car prices are down because people will probably drive more if it’s so expensive to fly. But gas prices are back up to a one year high, so maybe not? Next, we’ll start talking about the affordability of bicycles and skateboards…
It’s Not Over Till it’s Over
I do find solace in the fact that all measures of inflation have come down considerably over the past year. I do not find solace in the fact that many of them have started rising again. The Fed may not hike rates again next week, but some of this data still doesn’t take future hikes off the table.
Ignore the hiking cycle all together for a minute and let it sink in that inflation is still going up, just at a slower pace than it was a year ago. Hikes or no hikes, consumers and businesses are paying considerably more for stuff and services than they were before. Whether rates remain higher for longer, or the inflation target becomes more flexible, the bottom line is that costs are still high, still rising, and still a problem. This story isn’t over yet.
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