Experts: Inflation Components Rising Faster Than Expectations

The Consumer Price Index (CPI) rose 0.1% in August, above market expectations for a decline of 0.1%. On an annual basis, CPI inflation eased to 8.3% from 8.5% in July. But financial markets are paying more attention to core inflation, which excludes volatile energy and food components, and which rose 0.6%, notably higher than the consensus forecast for a 0.3% increase. Core inflation rose 6.3% on an annual basis, also above market expectations for a 6.1% increase. Price increases were broad-based.

Of particular concern is the acceleration in prices of many CPI components, such as shelter and medical care services, whose prices change infrequently i.e., are “sticky.” Shelter costs, for example, accelerated to 6.2% from 5.7% in July. The sharp rises in prices of many “stickier” components of the CPI basket warns that inflation will remain elevated for some time.

The Producer Price Index for final demand (PPI) fell by 0.1%, slowing annual producer price inflation to 8.7% from 9.8% in July. Core PPI rose 0.4% in August. Annual core PPI inflation eased to 7.3% from 7.7% in July. Headline and core producer inflation are slowing, but it will take some time for that to work its way to consumer prices.

The Fed’s survey of American households’ inflation expectations shows one- and three-year ahead inflation expectations are easing, with three-year inflation expectations now a hair below their 2015-to-2019 average, but one-year expectations are still well above pre-pandemic levels. Fed officials have repeatedly emphasized the importance of returning expectations to levels consistent with the Fed’s target to prevent them from becoming a self-fulfilling prophecy.

Sales of retail and food service establishments rose 0.3% in August, beating market forecasts for a 0.2% increase, but July retail sales were revised down to a decline of 0.4%. Core retail sales, which are used to calculate nominal consumer spending in the GDP report, were unchanged in August, below the 0.5% consensus; July control sales were revised down to 0.4% growth from 0.8%. Consumer spending is likely to be weak in the third quarter.

Industrial production (IP) declined by 0.2% in August, mostly due to a sizeable 2.3% decrease in utilities output. Manufacturing rose by an anemic 0.1%. Mining was flat. The drop in utilities output is surprising, as large swathes of the country experienced heatwaves last month. In three of the last four months, IP either contracted or was unchanged—the industrial sector is losing momentum.

Bill Adams is senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.