The Line: Consumer Prices Rose More than Expected Last Month

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.

The Consumer Price Index rose 0.1% in August, and was 8.3% higher than a year ago. Now, a 0.1% increase in prices might not sound that bad, but economists were looking for a slight decline, so this is disappointing news. Core inflation—which excludes food and energy prices—rose 0.6% last month and was 6.3% higher than August 2021. These figures were also higher than expected. The recent decline in energy prices—down 5% in August fueled by a 10.6% drop in gasoline—had some economists looking for a better headline number. There’s also been a lot of talk lately that inflation has peaked, and consumer prices would start to come down. No such luck in August. Big increases were posted last month in food prices (+0.8%) and housing (+0.7%). And even with the sharp drop in gas prices last month, they are still 25.6% higher than a year ago. The stock market reacted quickly and harshly to this report, with the Dow falling 3.94%, the S&P 500 down 4.32%, and Nasdaq plunging 5.16%. Their pessimism is based on the realization that this data will push the Federal Reserve to hike rates by at least 0.75% at their meeting next week. And as we all know, rising rates are the last thing the stock market wants. The news didn’t get any better the next day, when the Producer Price Index came out. While the PPI did fall 0.1% in August, it remained 8.7% higher than a year ago. Now that’s an improvement from the 9.8% annual rise in July, but there’s no denying that inflation is still way too high. Just like consumer prices, the producer price data was helped by a sharp decline in energy prices. Core PPI rose slightly last month, and remains 5.6% higher than a year ago. To sum up, while the annual rate of increase in inflation is starting to come down, it remains well above the 2% level the Federal Reserve is looking for. So, expect the Fed to keep hiking rates aggressively for the next several months.

Retail Sales Rose 0.3% in August

Now that’s a better-sounding headline than the inflation data, but a closer look at the numbers says we should view it with caution. If auto sales are removed—they were up a healthy 2.8% in August—retail sales would have fallen 0.3% last month. Another downer was the revision of July’s data from unchanged for the month, to a 0.4% decline.

We also should remember that this data is not adjusted for inflation, so retail sales can be driven higher by rising prices, more spending, or both. Since consumer prices were up 0.1% last month, this report at least tells us that consumer spending (+0.3%) is rising slightly faster than prices.

With prices rising faster than wages—real wages were 2.8% lower in August than a year ago—consumers will find it hard to keep spending at these levels. We can only hope that inflation continues to decline, and the labor market remains strong.

Speaking of the labor market, that leads us to our final headline.

Weekly Jobless Claims Fall for the Fifth Consecutive Week

We continue to hear buzz about an uptick in layoffs, and here in NYC we just heard that Goldman Sachs is planning on cutting several hundred jobs this month. That’s why it gives me great pleasure to announce that the initial claims for unemployment recently fell to 213,000. This marks five straight weekly declines, and the lowest claims have been since the end of May. It’s also another reminder not to count out the labor market’s strength, which is the biggest hope we have for avoiding a full-fledged recession.

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