Inflation: Where Are We Now?

Commentary

Well, that left nothing to the imagination. The August CPI report, in fact, buried the idea that inflation is abating and that new “juice” from the Fed is just around the corner.

Again, the trusty 16 percent trimmed mean CPI, which removes short-term fluctuations from the trend, made it abundantly clear that inflation has a strong head of steam. The Y/Y number was up by a record +7.2 percent.

That’s more than double the 3.2 percent reading of August 2021, and by far the highest print since the series was established in 1985.

Y/Y Change in 16% Trimmed Mean CPI, 1985–2022. (Data: Federal Reserve Economic Data [FRED], St. Louis Fed)

To be sure, the August inflation report would have been even worse, save for the sharp drop of gasoline prices since June. But even then, the energy price abatement story was not all it was cracked up to be.

That is, gasoline prices rose by a “mere” 26 percent Y/Y in August compared to a sizzling peak gain of 60 percent in June. However, the Y/Y increases in electric utility prices and pipeline gas for home heating continued to climb higher:

• Electric utilities (brown line) was up 15.8 percent in August compared to 11.1 percent in March;
• Pipeline gas prices (purple line) were up 33.0 percent in August compared to 21.6 percent in March.

In a word, there is still plenty of energy inflation momentum in the CPI, even if pump prices for gasoline have taken a relative breather. But even there, the 26 percent gain Y/Y is not exactly deflationary when it comes to family budgets.

Y/Y Change in Gasoline Prices bs. Pipeline Nat Gas and Electric Utilities, March 2022 to August 2022. (Data: Federal Reserve Economic Data [FRED], St. Louis Fed)

It might also be noted that food has more than double the weight in the CPI versus gasoline (13.5 percent vs. 4.9 percent), and food inflation showed no sign of abatement in August.

In fact, the August Y/Y gain of 11.4 percent was more than triple the year ago gain (3.7 percent) and the highest increase in 43 years. You have to go back to the roaring commodity markets of 1979 to find an equivalent slam on household food budgets.

Y/Y Change In CPI For Food, 1979–2022. (Data: Federal Reserve Economic Data [FRED], St. Louis Fed)

Moreover, when you look under the hood, it is evident that food inflation still has more upward momentum. That’s because the sub-index for food-away-from-home (aka restaurants) came in at just 8.0 percent in August versus a red hot 13.6 percent gain in grocery store prices (food at home).

Needless to say, restaurant menu prices will soon catch up with underlying food costs as represented by the black line for food at home; and on top of that lies the further cost pressure of rapidly rising restaurant wages.

Y/Y Increase in Food-Away-From-Home Vs. Food At Home, 2015–2022. (Data: Federal Reserve Economic Data [FRED], St. Louis Fed)

In fact, wage cost pressures in the hotel, restaurant, and related services industries have been ferocious, rising at double-digit rates, and are now at levels far above anything recorded during the last 15 years. Eventually, those costs will pass through into menu prices and room rates, or there will be sweeping economic carnage in the Leisure & Hospitality sector.

Y/Y Change in Average Hourly Earnings for Leisure & Hospitality Workers, 2007–2022. (Data: Federal Reserve Economic Data [FRED], St. Louis Fed)

Nor are restaurants, bars, and hotels the only service sectors showing accelerating inflation. For services as a whole (which account for 61 percent of the CPI), the August Y/Y gain was 6.8 percent, marking the highest level since September 1982.

Needless to say, the right-hand portion of the chart below gives no indication that the main drivers of the CPI—domestic services—are about to roll over anytime soon. Last August, in fact, the services CPI was running at just 3.0 percent on a Y/Y basis, which accelerated to 4.6 percent by January and is now pushing 7.0 percent.

Y/Y Change in CPI for Services, 1982–2022. (Data: Federal Reserve Economic Data [FRED], St. Louis Fed)

Indeed, when viewed as a contribution to the top-line CPI change, the accelerating level of services inflation is clearly evident. The share of the total CPI gain attributable to services prices has now been accelerating for months as shown in the blue bars below.

Share of Contribution to the CPI Topline by Product Group, 2017–2022.

Finally, the August CPI once again reminded of the contribution of shelter and rent inflation to the inflationary momentum now underway. That sub-index was up by 6.3 percent in August—more than double its pre-COVID trend–and actually accelerated from prior months.

Y/Y Change for CPI for Shelter, 2018–2022. (Data: Federal Reserve Economic Data [FRED], St. Louis Fed)

So to the dip-buyers, we say be our guest. Just keep clinging to the vestiges of the belief that inflation will soon be conquered, a bad recession avoided and so the Fed is freed to pause, then ease.

But the fact is, Tuesday’s, Sept. 13, CPI report destroyed the idea that the Fed will pause soon. In fact, excluding volatile food and energy prices, the so-called core CPI rose 0.6 percent, which if sustained would be an annual rate above 7 percent.

That’s higher than any time from 1991 to the pandemic; and it’s also what the paint-by-the numbers folks at the Eccles Building watch like a hawk.

Originally published on DavidStockmansCorner, reposted from the Brownstone Institute

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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David Stockman is senior fellow of Brownstone Institute. His career in Washington began in 1970, when he served as a special assistant to U.S. Representative, John Anderson of Illinois. From 1972 to 1975, he was executive director of the U.S. House of Representatives Republican Conference. Stockman was elected as a Michigan Congressman in 1976 and held the position until his resignation in January 1981. He then became Director of the Office of Management and Budget under President Ronald Reagan, serving from 1981 until August 1985. After leaving government, Stockman joined Wall Street investment bank Salomon Bros. He later became one of the original partners at New York-based private equity firm, The Blackstone Group. Stockman left Blackstone in 1999 to start his own private equity fund based in Greenwich, Connecticut. He is the author of many books on politics, finance, and economics. He runs the subscription-based analytics site ContraCorner.