August CPI
At an annualized rate, monthly inflation as measured by the Consumer Price Index (CPI) rose 7.8% in August, up from 2.0% in July. Our preferred measure of trend CPI inflation (the 3-month annualized) increased from 1.9% in July to 4.6% in August.
While we prefer to look at the overall CPI when looking to its trend, others prefer to look at core CPI inflation. Excluding food and energy, monthly inflation rose from 1.9% in July to 3.4% in August. However, the 3-month core CPI inflation rate actually fell, from 3.1% in July to 2.4% in August
What to make of all this? CPI inflation in August is up and well above the Fed’s 2% target for inflation. Comparing the overall CPI inflation with core CPI inflation shows that part of August’s increase in inflation is due to food and energy. The BLS specifically pointed to gasoline prices and the cost of shelter. Some commentators look at so-called `supercore’ CPI inflation, and that some of these supercore measures specifically exclude the cost of shelter. (What’s the end game for all these core measures? Will commentators be watching the price of bananas?)
August PPI
Producer Price Index (PPI) inflation for August similarly accelerated, from 4.9% in July to 9.3% in August (annualized monthly percent changes). The 3-month annualized PPI inflation rate also increased, from -0.1% (July) to 4.3% (August).
Looking instead at the PPI for personal consumption paints a more alarming picture: its monthly inflation rate rose from an annualized 4.3% in July to 40% in August! Its 3-month annualized counterpart also shows a marked increase, from -6.1% (July) to 15.4% (August).
It seems intuitive that producer prices should, eventually, be reflected in consumer prices. Looking across many years of data, the pattern that emerges is simply that inflation rates tend to move together. It seems difficult to make a case that higher PPI inflation is the harbinger of higher CPI inflation.
PCE for July
The PCE price index is released nearly a month after the CPI, and so August PCE inflation is not yet available. At an annualized rate, monthly PCE inflation rose slightly from 2.5% in June to 2.6% in July. On the other hand, the 3-month annualized PCE inflation rate fell from 2.5% (June) to 2.1% (July). Core PCE inflation shows a similar pattern.
Policy Outlook
Fed watchers know that its preferred measure of inflation is the PCE. The key question is: Will the large increases in CPI inflation in August also show up in the PCE inflation measures? It’s tempting to think that they must since the prices of individual items used in these indices are, presumably, essentially the same – the chief difference, then, being the weights associated with the prices of individual items. While PCE inflation generally tracks both CPI and core CPI inflation, these various measures of inflation exhibit considerable disparity.
Will the Fed take a pause, or continue raising its target for the Federal Funds Rate? If we knew the answer to this question, we’d probably be working on Wall Street. Answering this question probably means getting inside the heads of the voting members of the FOMC. Do they think that inflation is continuing to trend down? Or are the August CPI and PPI numbers the harbinger of an increase in inflation that needs to be nipped in the bud? Does the FOMC wish to avoid getting “behind the curve” as seems to have happened during the pandemic when they kept repeating that it was likely that the inflation was transitory due to supply chain issues?
