August Inflation Shocks Expectations

“U.S. Consumer Prices Blow Away Expectations, Rise For 27th Straight Month”… “The Hottest U.S. Inflation in 40 Years Shows Little Sign of Cooling Off”… “Stocks Tank After August Inflation Data”…

There is but a sample of today’s fevered headlines.

The August Consumer Price Index (CPI) came issuing this morning. It revealed that consumer prices increased 0.1% since July.

We might inform you that 47 of 50 polled economists “missed” — and to the downside.

Yet we are in magnanimous spirits today. And so we will not.

They nonetheless forecast a 0.1% price fall from July… and got the 0.1% price rise instead.

Rather than the 8% year-over-year inflation they projected, August year-over-year inflation came in at 8.3%

Meantime, core CPI is the Federal Reserve’s inflation metric of choice. It rinses out food and energy prices.

Today’s report reveals that core CPI galloped 0.6% in August. The wiseacres forecast a mere 0.4% jog past July’s rate.

But Gas Prices Are Down!

The foregoing presents an apparent conundrum:

Energy prices push inflation up. Yet gasoline prices are in swift retreat — are they not? It is true, the data reveal they are.

CPI’s energy component slipped 5% from July. That represents the largest backing-up since April 2020, when lockdowns entered force.

The gasoline index, most notably and conspicuously, plunged 10.6% in August.

What then explains August’s inflationary gurgles? What resolves the conundrum? Zero Hedge:

The big shock was the food index which increased 11.4% over the last year, the largest 12-month increase since the period ending May 1979, while the food at home index rose 13.5% the largest 12-month increase since the period ending March 1979.

These are the rising food prices the Federal Reserve looks away from… incidentally.

You of course cannot look away from them. Your eyes leap from their sockets each time you sight the bill, gobsmacked and astonished.

In all, 70% of the CPI bundle registered an August increase exceeding 4%.

When Will The Inflation Reduction Act Kick In?

August shelter and rent leaped to 6.24% from July’s 5.69%. Health insurance costs jumped 2.4% from July’s — and are up 24.3% on the year.

Thus “transitory” inflation has taken on a sort of permanence.

Bankrate’s Mark Hamrick gives the overall view:

The prices for necessities continue to fuel this fire, including shelter, food and medical care. The substantial decline in gasoline prices is noteworthy but doesn’t address the overall problem with inflation.

Adds Mr. Mark Zandi, chief economist with Moody’s Analytics:

The core inflation numbers were hot across the board. The breadth of the strong price increases, from new vehicles to medical care services to rent growth, everything was up strongly. That was the most disconcerting aspect of the report.

Meantime, CNBC warns that today’s report challenges “the inflation narrative”:

For the better part of a year, the inflation narrative among many economists and policymakers was that it was essentially a food and fuel problem. Once supply chains eased and gas prices abated, the thinking went, that would help lower food costs and in turn ease price pressures across the economy.

August’s consumer price index numbers, however, tested that narrative severely, with broadening increases indicating now that inflation could be more persistent and entrenched than previously thought.

Just so. How do you like it?

Falling Wages for 17 Consecutive Months

Are you keeping up? Alas you are not. Real wages declined for the 17th consecutive month in August.

That is, your wilting paycheck has fetched you less and less for the 17th consecutive month.

Thus inflation is a supremely skillful pickpocket. It is justly and aptly named the invisible thief.

And it presently has you by the ear.

On such days as these we often consult Mr. John Williams’ ShadowStats site.

That is because this fellow scatters the statistical fogs — the statistical fogs government throws up to conceal true inflation.

Mr. Williams reveals that the true inflation rate far, far exceeds the official rate.

Yet today our courage would not answer. We feared a true accounting would fluster us, wobble us and diminish our already diminished spirits.

And so we stayed away.

Yet perhaps you are of an optimistic turn of mind. You are a glass half-full man and a silver lining-seeker.

Here then is your half-full water glass and your silver edging:

The costs of airline tickets, coffee — and fruit — declined last month.

Yet there was no joy on Wall Street today…

A Vicious Thumping

The stock market took a vicious whaling, harpooned heavily by the report.

The Dow Jones plummeted a harrowing 1,276 points on the day. The S&P 500 took a 177-point trouncing and the poor Nasdaq Composite hemorrhaged 632 points — a 5.16% defeat.

Gold lost $28 — precisely — while Bitcoin lost $2,091, at writing at least.

Today’s report gave Wall Street a good reminder that it can stow all hopes of Federal Reserve clemency near term.

Principal Global Investors chief global strategist Seema Shah:

Today’s inflation data cements a third consecutive 0.75% increase in the fed funds rate next week… core CPI is once again on the rise, confirming the very sticky nature of the U.S. inflation problem. Until the Fed can tame that beast, there is simply no room for a discussion on pivots or pauses.

This Shah claims today’s inflation data “cements” a third consecutive 0.75% rate hike.

Yet could the Federal Reserve resort to action bolder yet? Might it elevate rates a full percentage point next week — by a thumping 1%?

The market presently gives 32% odds of it. Yesterday it gave 0% odds.

Tightening Upon Tightening

Meantime, the odds of a 0.75% November hike leaped to 60% and the odds of a 1% December hike near 50%.

Thus we discover that the federal funds rate may exceed 4% by year’s end. When we factor for the quantitative tightening presently underway, the Federal Reserve may  squeeze markets plenty hard.

Its quantitative easing may hack away $1 trillion from the balance sheet this year.  Estimates are that a $1 trillion carving equals one percentage point of rate hikes.

The stock market — and the economy — may then confront a 5% effective rate before long.

Neither can withstand a 5% rate… by our reckoning at least. Only one question remains:

What is the breaking point?

We do not know of course. No one truly does.

Yet unless the gods are exceedingly and unfashionably kind, we will have our answer soon enough…

The Daily Reckoning