The September Consumer Price Index report, assessing inflation for the month of August will be released on September 13 at 8.30am E.T. The Fed has signaled that the two recent CPI reports were encouraging. However, in a recent speech, Fed Chair Jerome Powell stated that, “two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.”
That’s why September’s CPI will matter. There’s still a reasonable chance that the Fed raises rates again in 2023, if not at their September meeting then in November. One reason they may do so is if the upcoming CPI report shows concerning inflation trends, breaking with the two prior CPI reports.
Inflation Nowcasts
Nowcast data from the Atlanta Federal Reserve predicting August’s inflation is not encouraging. It predicts August’s core CPI (excluding food and energy) could show a 0.38% increase in month-on-month prices. That would be an uptick from the 0.2% monthly rise for June and July. However, nowcast predictions of inflation, though historically useful on average, have over-estimated inflation in recent months. So there’s a chance August’s CPI prediction proves too pessimistic.
Housing
The trend in home prices, or shelter costs, is likely to be decisive in shaping August’s CPI figures. That’s because shelter carries a large weight in the CPI series, with almost a 35% weight in headline CPI.
In the past two reports, shelter costs rose 0.4% on a monthly basis, this was lower than many prior months and helped bring inflation lower. That trend may continue, as lease costs in the CPI data follow home prices with a lag and generally U.S. home prices softened over late 2022 into early 2023 which likely still has to be picked up in the CPI series. That said, home prices nationally have rebounded a little in recent months, so the Fed has expressed concern that if shelter costs start to rebound, that may justify higher interest rates.
Services
Then beyond housing, the Fed is watching services costs very closely. As many other prices have eased, services prices continue to rise, fueled, in part, by rising wage costs. In the most recent CPI report various services fell in price from airfares to various financial services. However, it’s unclear if this is a trend or volatility in prices. The Fed is also watching wage data closely. The Atlanta Fed’s Wage Growth Tracker shows wage growth falling back from peak levels, but still running at an over 5% annual rate. A continued rise in services prices is another issue that may make the Fed more likely to raise interest rates again in 2023.
If the upcoming CPI report shows a monthly increase in core CPI of 0.2% or lower, then the Fed may have to concede that the recent individual datapoints of disinflation are becoming a trend.
However, if inflation runs at materially over a 0.2% monthly rate then the Fed will be watching services and shelter costs closely to determine if rising prices in these categories might warrant another increase in interest rates later in 2023.
We are likely well past peak inflation at this point, but the Fed is still fine-tuning interest rates with the goal of returning inflation to its 2% goal promptly. The upcoming CPI report may help signal if another 2023 interest rate hike is likely.
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