The August Consumer Price Index (CPI) rose 8.3% year-over-year (YoY) from 8.5% in July. Inflation pressures continue to ease in a few categories such as gasoline, airfare, and used vehicles. However, several categories are still running hot. Food prices rose 11.4% from a year ago, the largest year-over-year increase since 1979, and electricity prices increased 1.5% month-over-month, the fourth consecutive increase. Yearly electricity prices rose the largest since August 1981.
Declining prices at the pump could support consumer confidence in the near term, but rising electricity and natural gas prices will put a damper on the consumer outlook as we move into the winter season. The U.S. does not have an energy crisis like Europe. However, the impact of higher energy bills will likely affect consumer spending in the upcoming cooler months.
Rents will likely continue to rise as long as a tight housing market keeps would-be buyers away. Recent pricing trends for rent of primary residence is alarming. Rent prices are up 6.7% (YoY), the fastest rate since the early 1980s. The booming housing market explains most of the rise in rental costs. During the recent period of unusually low mortgage rates, housing demand skyrocketed and home price appreciation reached new levels. High housing costs pushed many homes out of reach for would-be millennial buyers and for first-time buyers with no pre-existing home equity. High demand for homes and low supply created insurmountable hurdles and pushed many to be renters instead of home buyers.
Headline inflation is likely past its peak, but the Fed still has work to do. The Fed will likely increase rates again by 75 basis points later this month as core inflation is not cooling as fast as expected. As policy makers have publicly indicated, inflation is the primary concern and for now, the Fed is willing to sacrifice economic growth in the near term to get inflation back to the long-run growth rate of 2%.
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