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2022: Inflation Headlines, Update 3

September 14, 2022
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Gasoline prices falling over -10% for the month of August led to a modest 0.11% increase in headline CPI.  However, Core CPI (All Items Less Food and Energy) rose 0.57% in August and are up 6.3% Year-over-Year (YoY).  The Core number is likely what has spooked the stock market, leading to expectations for continued rate hikes from the Fed until we see some reprieve from elevated Core inflation.  Owner’s Equivalent Rent of Residence, which is one of the largest components of CPI (over 23% of the index), was up 0.7% in August and is up 6.3% YoY.

A few key points from this month's CPI Report:

  • Food prices have continued their relatively high price increases with a 0.8% increase for the month of August and up 11.4% YoY. Energy prices offset some of that being down -5% overall with Gasoline down -10.6% for the month.  Energy Prices overall are still up 23.8% YoY.
  • While energy prices do indirectly affect Core Prices in some way over time, that causation may have been over estimated as Core Prices continue to rise despite lower energy costs.

Another important inflation measure, and the one the Fed continues to rely on more closely for policy decisions, comes out at the end of the September.  The Personal Consumption Expenditures (PCE) Chain-Type Price Index is the measure published by the Bureau of Economic Analysis and cited by Fed officials as their preferred benchmark.  One of the main differences between PCE and CPI is that PCE changes the weighting or relative importance of categories frequently.  This helps account for substitution effects resulting from price or preference changes.  For example: people may buy more tea if coffee gets more expensive, buy more margarine if butter prices go up, use different types of cooking oils in response to price changes, etc.  While the CPI index does make changes, they are less frequent and rely on a “fixed” basket of goods over time.  Both measures are useful and provide different aspects of inflation that are relevant.

All this to say, Core PCE has been running slightly slower than Core CPI.  Looking at the chart below, we can see that Core CPI growth was on a downward trend as well, but August saw it spike back up.  The Core PCE measure, which will be released on September 30, will be another important bellwether for the Fed and the market.

Short term market fluctuations should not surprise us at this point.  Inflation, Mid-Term Elections, and potential Recession are going to give the market lots of reasons for volatility. It will be important to keep a long term perspective.

Have a goal, a plan, a strategy, and stay the course.

Sources: 

U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL], retrieved from https://www.bls.gov/news.release/cpi.nr0.htm, September 13, 2022.

U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PCEPILFE, September 14, 2022.

U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPILFESL, September 14, 2022.