Name: August's CPI Report Accelerated Largely Because of Rising Gas Costs
Uploaded: 2023-09-13T15:31:00Z
Duration: 16 min 15 s
Description: Inflation fell every month for a year, but in July that trend ended with housing prices rising along with the prices for oil and gas. WSJ’s Dion Rabouin digs into August’s CPI inflation report and explains what’s really happening with prices. Photo: Stefani Reynolds/Agence France-Presse/Getty Images

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Inflation fell every month for a year, but in July that trend ended with housing prices rising along with the prices for oil and gas. WSJ’s Dion Rabouin digs into August’s CPI inflation report and explains what’s really happening with prices. Photo: Stefani Reynolds/Agence France-Presse/Getty Images

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 August's CPI Report Accelerated Largely Because of Rising Gas Costs

I am Dion Rabouin, reporter at the Wall Street Journal. I know you know something a little different, those of you who've been watching Market Takes. We are in the brand new studio, but we are still bringing you the same live fly Market Takes. Appreciate you being with us, I know you could have been anywhere in the world, but you're here with me and you know what, I appreciate that. We are talking about Inflation today, we are digging into the CPI, Consumer Price Index, Inflation report that just came out this morning talking about what happened in August. We are gonna talk about, of course, what the report showed and how that compared to expectations. I'm gonna give you some major takeaways from this report. We're also gonna talk, of course, about the market reaction, what happened with Stocks, Bonds, Commodities. I really wanna talk about the big picture reaction, where we are right now in the Markets rather than just the response to today's report. We're also, of course, gonna talk about how this CPI report influences or affects the Fed and their decision. They're gonna be meeting a week from today, we'll be right here on Market Takes at 4:00 pm Eastern, breaking that meeting down for you, so be sure and be with us, then we will be talking about how this report affects the Fed's decision on about a week from now or exactly a week from now and then, of course, we'll be talking about what comes next because we are always looking forward here on Market Takes even though it is backward looking data. So let's get into it. The CPI report for August showed 3.7% or Inflation rose at a 3.7% rate year over year. Let's show a chart up here on your screen so you can see just what we're talking about. Now, if we go back... We're going back to January 2022 here, and you see Inflation rises up until June and then it comes back down and hit that 9.1% rate in June of 2022 and then for 12 months straight, Inflation just goes down, down, down, you see it there, until June of 2023, Inflation... And then July 2023, we saw Inflation pick back up and then in August 2023, which is the report that we just got, we saw Inflation rise even higher. So going from 3% in June, 3.2% in July, 3.7% in August. So we are seeing right now, Inflation sort of work backwards and move away from what the Federal Reserve wants and the goals, that's important and that matters because the Fed really is driving this economy... Has been driving this economy for a long time and as they raise rates, it gets harder for the economy to grow, gets harder for businesses to grow, for folks, consumers to get more money to borrow, to do things that they wanna do. So as Inflation picks back up, the Federal Reserve is definitely watching, and as you see there, Inflation definitely picking up. Rose 0.6% month over month and again, that was right on target, but this 3.7% Inflation, this 3.7% reading we got for Inflation, a little bit above expectations, just a tad bit. So this was priced in this big... This pickup that you're seeing there, the increase, that's priced in, it doesn't mean the market isn't going to react though. So this charge is illustrating this longer run theme of Inflation coming down and then picking back up over the last few months. You've got to know what's going on with Inflation because Inflation really is driving everything right now. So like I said, a little bit higher than expectations. Economists had predicted 3.6% year over year Inflation, 0.6% month over month. So we got a little bit higher than that, but not much. Core CPI, let's talk about that. Let's talk about when we strip out those volatile food and energy prices, what we get. I'm gonna put another chart up here on your screen, just give you an idea of what we're seeing from the Core numbers. So there, you've seen that had been a little stickier. We had seen Inflation sticking above 5% even after overall Inflation had fallen down to 4% even close to three, we had seen that Core prices holding up. Well, now, we're starting to see those come down, and this is important because this is what the Fed really focuses on. The Fed knows they can't do all that much about the price of food, the price of oil, the price of gas at the pump, but what they can control is what Core is showing us. A lot of things with regard to housing, regard to labor market, that's where this is, and this is showing it's higher than overall CPI. We got a 4.3% rating in August or 4.3% reading in August I should say, but it is coming down, moving in the right direction. Month over month though it did rise a little bit more than expected 0.3% and this charge is illustrating, you know, the way that Core CPI is held up, but is now coming down in the way the Fed wants it to and that's good news for folks who are watching the Fed saying, "Oh no, we hope they don't raise rates anymore this year." We'll talk more about that in just a second. So let's talk about the major takeaways from this report. Today's report tells us that the CPI headline Inflation number is rising, but that's largely because of gas prices. When we dig into the report, we can see that the largest contributor was the Gasoline Index. The Bureau of Labor statistics actually saying that gasoline accounted for 50%. So half of the overall increase in Inflation that we saw last month was due to gas prices, and we saw a huge pickup when we look at the numbers in terms of month over month for the pickup in gasoline, oil, energy, all those things, and this was an increase month over month of 10.6%. That is a huge blockbuster blowout number when it comes to gasoline or any particular index, any particular portion of the CPI. 10.6% was the biggest increase in the overall CPI. To give you an idea of how big that is, things tend to rise month over month. Again, I said CPI rose 0.6% overall month over month. Well, it rose 10.6% in terms of gasoline, the Gasoline Index. Now, that's good news and it's bad news. The good news is this was expected. We've seen gas prices rising, we've seen those prices of the pump rising, we've seen those oil prices rising in the Markets, so this was expected, no one was caught off guard by this big rise in gas, but the bad news is because we've seen oil prices rise continuing into September, we will likely see Inflation rise up again on that headline level for September. That means Inflation could start pushing back towards 4%. Now, obviously, we don't know, it's September 13th right now, but the theme that we have seen and we're gonna look at the Markets in a sec, I'll show you just what I'm talking about, the theme we've seen is for higher gas prices, oil prices, and that's all factoring into Inflation, Inflation expectations. Oil prices also go into everything because when you're getting something, odds are it was delivered on a truck. Well, that diesel fuel charge and the prices that, you know, anyone who's delivering items to your store, anyone who's driving around for their job, anyone who's getting to work, anyone who's powering a building, those things are all based on fossil fuels, oil, gas, the prices all come back to there. So the prices of goods and services are likely to be going up because those gas prices go up and folks have to keep raising prices. Now, the Fed is not in control of oil. So when it comes to the Federal Reserve, it's a good news sort of bad news situation for them because they say, "Okay, well, gas prices might come down, we don't know, we've got to focus on the Core Index," and that's coming down the way they want it to. Similarly, good news about the Core CPI. Good news is it was near expectations around 0.3%, that's pretty low and again, moving in the right direction, Core continues to decrease and housing costs are starting to come down. Remember, housing last month was the biggest contributor to overall Inflation accounted for 90% of the increase, 90%. So this month it's now oil and gas and Gasoline Index that's leading things. Housing is retreating in terms of the role that is playing in pushing up Inflation, that's definitely a good thing. The bad news is, Core was higher than expected, despite the fact that most of the increase was from food and energy. So you've still got Core being not only higher than CPI, but higher on a month over month level than what was expected. That's just telling us that Inflation is being pushed up by a lot of different things right now. Given that the PCE, the Fed's favored measure of Inflation also rose last month, we can expect to see another increase in that and we can expect to kind of see that the trend for Inflation right now is moving back up instead of down, that's not what the Fed wants, that's not necessarily good news, it's not terrible news, but it's not great news, it's not something that's gonna get investors really up and excited and, you know, cheering and saying, "Hey, the Fed's done, they're gonna have to cut rates soon," that's not what we're saying. Keep in mind, interest rates are very high right now. We are at levels that have historically led to recessions that have historically led to a struggling economy. The economy overall is still pretty good, but right now, where we are, we don't really want to move higher because that Inflation forces the Fed's hand. So we're not there yet, but we aren't at a place where we can say kind of mission accomplished. Obviously, like I said, the biggest reason for the increase, gas and oil. In addition to the big 10.6% month over month increase in gas in the Gasoline Index, fuel oil rose 9% and energy commodities rose 10.5%. Most of the other increases to the CPI were 0.1, 0.2, 0.4, something like that, some things like used cars and trucks even decline, but then you look at that oil and gas component, 10, nine, 10.5, energy overall was 5.6, that's the only place in the CPI that you see those numbers. So again, big part of this was oil and gas and we know that's moving up. We also know that's something that consumers notice and that affects Inflation expectations and as folks expect Inflation to rise, they start demanding more wage increases, they start being okay with paying more money for items, and that pushes Inflation up because we know those corporations love to raise prices and if folks have in their mind, "Okay, Inflation's going up," they don't sort of bulk and step back when they see prices going up, they just say, "Oh, well, that's how it goes," and they pay it and that pushes Inflation up even further. Energy prices. One thing I want to talk about is where we are and why we're seeing this. Now, a big piece of this is the way energy prices moved. Energy prices picked up in a big way and peaked kind of in the summer of 2022, then they started going down. So what we're comparing to when we look at this report is where energy prices were a year ago. Well, they were lower, they were actually higher a year ago than they are now, but we have seen a consistent increase in energy prices, in gasoline prices, in oil prices, and what we're gonna start doing is as we move further into autumn and into the winter, we're gonna start comparing to energy price increases that were lower. So keep in mind, the base was here when we were in June, July, really going back to May. Right now, the base has been coming down. So as oil prices stay elevated, we're comparing to energy prices when they were lower and that's gonna start moving Inflation higher if energy prices stay where they are, if oil prices stay where they are. Right now, when we look out at the Fed Fund Futures Market, investors are still saying this doesn't change anything about September, they're still not sure about the rest of the year, there's about a 50/50 chance the Fed raises rates one more time this year, but investors not convinced that this moves the Fed at all. They're pretty locked in for no rate increase this month, they're meeting next month, but... Or sorry, they're meeting next week, but keep in mind, that they're going to signal what comes next, they release a summary of economic projections and the dot plot, that's gonna tell us how they view the economy going forward and that's what you're gonna wanna focus on for that meeting. Let's take a look at what's going on in Markets because I think the action in Markets right now is very interesting. You're seeing the Dow right now up just hanging on to being positive in the green. The S&P and the Nasdaq though have turned negative. We saw after this report came out, the index has moved a little higher. You see the Nasdaq there moving decidedly negative. Investors have kind of wrapped their heads around this, they're saying, "Oh, we don't really like this." Let's take a look at what's going on in Bonds. The government bond is like... Really haven't moved. You're seeing the 30-year, the 10-year, all these notes across the board, really little change. You saw a bit of a move from the 10-year note right after that CPI report came out moving higher. Now, it's moving lower, kind of doing the same thing as the stock market. You're seeing a similar move from the 2-year, which is the most aligned with what people expect from the Federal Reserve. You saw a big spike initially after the report came out and now, you're seeing a move lower, seeing a little bit of consolidation. Not much to talk about here in currencies. The Euro is picking up, is dropping a little bit, so you're seeing the dollar increase. When we look down here on the Dollar Index, the US Dollar Index up just a little bit, the WSJ Dollar Index, which compares the dollar to come at... To currencies, excuse me, like the Chinese Yuan, the Brazilian Real, Mexican Peso, things like that and those broader currencies in Europe, you're seeing that pick up a little bit and that move against the Euro is pretty significant. Want to talk to you about Commodities and wanna talk especially about oil. As we look on this year to date oil chart, you're seeing exactly what I was talking about, right? Really going back to July, you see oil was down there about $67 now, we are up here around $90 and that's only WTI. When you look at Brent Crude Oil, that's even more pronounced. We are up above $90 a barrel and that's a big difference from where we were just in July down there around $70 a barrel. This is a big spike price spike and you can just really see that, and this is what Inflation... This is what the CPI report is showing us, this big spike right here in oil prices, almost all that is being factored into CPI. So again, the market just showing us and the market illustrating what's going on in terms of overall Inflation just as that gasoline, that oil price piking and picking up, well, that's what we're seeing with overall Inflation. There's lots to Inflation more than just oil, so that's what's kind of holding it down, but we are seeing oil prices pick back up and that is bringing Inflation up with it. Now, how does this influence the Fed? Well, the Fed is looking a little split in terms of what they want to do. You've got a portion of the committee that really is committed to, "Hey, you know we haven't done enough on Inflation." And those folks, when they see this report, they're gonna say, "Hey, Inflation's rising up higher, we really need to stay strong, we need to make sure and let the market know that we are committed to 2% Inflation, not two and a half, not three, we want two and we need to hammer that home." Then you've got another part of the Fed, another group within the Fed that's saying, "Hey, listen, I'm seeing consumer delinquencies rising, I'm seeing credit card delinquencies rising, I'm seeing this jobs rate slow down, we're seeing lots of signs of stress within the economy. Folks can't get bank loans as readily as they could before, folks are having a hard time paying for things. We're seeing discount stores saying that people are struggling, they're not making as much money. We need to slow down, we might've raised rates too high already and we need to really commit to backing off and easing off." And that's the big split that we're seeing at the Federal Reserve. I think this report, because you saw overall Inflation pick up, but you saw Core Inflation kind of pull down, it gives both camps a little bit of ammo and we might see a descent at next week's Fed meeting. I think really, the interesting thing is gonna be November and December. I think really, the Fed is in line to not move rates at this meeting, I think everyone will agree, but going forward into November and December, you could start to see some dissents as this new Fed board. This is a very unique, diverse Fed board. It's got labor economists, it's got folks who are focused on different segments of the economy than the Fed has typically and historically been focused on. We will get the dot plots and summary of economic projections and I think you'll see a lot of difference in terms of what certain people in the Fed are thinking and what other people in the Fed are thinking and this report will really be the engine that fires a lot of that disagreement and a lot of that discord that I think you'll look to see. Big picture takeaway from this report is Inflation is not dead. When those oil prices are spiking up like they have, combining with a housing market that is just not falling apart because there's so much demand, as we've talked about here on Market Takes a number of times, we are seeing Inflation just not going away and that looks to be what this CPI report has showed us. Oil, obviously, is driving Inflation higher, housing's still playing a role, all those things are keeping Inflation elevated above where the Fed wants it to be, but it is coming down on the Core level so again, we're gonna see what happens and how the Federal Reserve makes its mind up about this data. Anyway, what comes next? We've got the leading economic indicators report out tomorrow, that's on Thursday and the US Manufacturing and Services PMI reports out on Friday, but, of course, we'll be right here, 4:00 pm Eastern on Market Takes on Wednesday, September 20th, breaking down the Fed meeting. Listen, I'm Dion Rabouin, reporter at the Wall Street Journal. This has been Market Takes, thank you so much for joining us and I hope you'll be back when we do it again next time.