To the equity markets and some economists, August’s consumer price index (CPI) reading, released on Tuesday, was an unpleasant close to summer.
CPI Inflation rose more than expected. The overall consumer price index, tracking a broad swath of goods and services prices for urban consumers, increased 0.1% for the month and 8.3% over the past 12 months, down slightly from July’s 8.5%.
In reaction, the Dow Jones Index fell 1,300 points.
It was core goods CPI — excluding volatile food and energy costs — that was the real surprise and disappointment. It advanced 0.6% from July (compared with expectations of 0.3%) and 6.3% from August 2021. That was up from 5.9% in July.
While gasoline prices fell, rising shelter and food costs offset them, according to Bureau of Labor Statistics data. The price indexes of shelter and groceries rose 0.7% for the month, and the indexes for medical care, new vehicles, and education also increased. In services, airline fares dropped about 4%, but medical care services rose 0.8% for the month.
While energy prices overall fell 5% due to the 10.6% drop in gasoline, electricity prices rose 1.5% for the month and natural gas by 3.5%.
“Strength in core goods prices came as a surprise and suggests that further easing of supply chain pressures and inventory rebuilding, particularly in autos, is needed before good price pressures can moderate,” according to a BofA Securities research report.
BofA economists expect the Fed to raise the federal funds rate 75 basis points next week and project a target range of 3.75% to 4.0% by year-end. That is up 50 basis points from BofA’s June forecast. Another 50 basis points of funds rate hikes could come in early 2023. The main message: risks of a “hard landing” for the U.S. economy are rising.
The corollary, though, is that inflation is likely in the process of peaking, according to BofA credit strategist Yuri Seliger, due to a slowing housing market, improving supply chains, ebbing COVID-related demand for goods, and tighter financial conditions given the rapid pace of Fed hikes.
One wildcard for inflation is the possible national freight railroad strike by conductors and engineers that could start early Friday. An inability to move goods across the United States could cause the prices of gasoline, food, and other consumer goods to spike.