Investors get a reality check about prices and Fed tightening.
Biden Administration officials have been claiming so confidently that inflation is under control and falling that investors may have believed it. Bad idea. Tuesday’s report on the consumer-price index for August showed inflation has remained high and sticky, and markets promptly fell out of bed.
And we mean from the top bunk. The 3.94% tumble in the Dow Jones Industrial Average was the worst day since 2020, and the declines in the S&P 500 and Nasdaq were worse. Investors apparently had believed the hopeful chatter that inflation was headed downward, and that the Federal Reserve wouldn’t need to raise interest rates so high as to court a recession. Investing lesson of the week: Never trust a politician.
Consumer prices overall rose 0.1% in August, after being flat in July. But the decline was almost entirely the result of falling energy prices. Gasoline fell 10.6% and fuel oil 5.9% in the month. That was a happy respite from the spring when gasoline prices averaged more than $5 a gallon nationwide, but prices at the pump are still up 25.6% in the last 12 months and still average $3.71 a gallon.
The larger problem is that the energy declines weren’t enough to offset price increases across nearly everything else. The 12-month inflation rate in August fell only to 8.3%, down from July’s 8.5%, but higher than the 8% to 8.1% that economists had expected.
Food remains the biggest pain point for consumers. Restaurant prices rose 0.9% for the month and are up 8% in the last 12 months. You can always eat at home, but grocery prices rose 0.7% in August and are up 13.5% from a year ago. Retailers aren’t betting on a quick turnaround. Kroger announced an expansion of its private-label business on Friday, convinced that customers’ taste for cheaper options will last long into the future.
So-called core prices, excluding food and energy, also keep rising. They were up 0.6% in August or 6.3% in the past year. Inflation continues to course through parts of the economy that are several steps removed from commodity pressures. That includes healthcare, which rose 0.8% in the month.
The service economy is also providing no price respite. Services excluding energy services accelerated in August from July and are now 6.1% more expensive than a year ago. (See the nearby chart.) Owners’ equivalent rent, the CPI report’s proxy for shelter, continued to rise briskly at 0.7% in the month and 6.2% for the year. That’s the highest since 1983, according to Berenberg economist Mickey Levy.
The low overall monthly inflation rate did at least allow real wages to grow 0.2%. That’s the second monthly real increase in a row after a year of declines. But as the editorial on a new Census report explains, it will take many more months of gains to overcome the losses in incomes caused by inflation.
Investors are surely right that the disappointing inflation news will confirm Fed Chairman Jerome Powell in his stated resolve to continue with monetary tightening. Another 75 basis point increase is likely this month, and that is unlikely to be the end. This is the price of letting inflation get carried away.
Consumer prices excluding food, energy rose sharply, showing broad price pressures strengthened
Annual inflation eased to 8.3% in August but came in higher than economists anticipated