Six Things to Know About the August CPI Spike

CPI data was released today, and much to the chagrin of many on the Wall Street, the number was higher than anticipated, clocking in at 8.3 percent vs. the expected 8.1 percent. Even Core CPI – or the change in prices excluding energy and food – came in at 6.3 percent vs. the projected 6.1 percent.

It can be tempting to have a knee-jerk reaction to these sorts of data points rolling across your screen, and while that sinking feeling in your gut isn’t entirely off base in this case, it is always prudent to take a moment to fully understand what the information means before reaching a conclusion.

Prior convictions about skewed CPI data were out of whack.

For months, those pushing back against bearish outlooks would argue inflation data was being parsed incorrectly. The argument was that the rise in energy and food prices were the primary drivers of inflation. Historically, such arguments have been reasonable, as these particular metrics tend to be more volatile. However, the fact that the Core CPI reading also came in higher seems to be indicative of a broader inflationary trend, undermining that argument.

Even though energy prices have plummeted, broad CPI was still up.

The important thing to remember when looking at CPI data is that one piece of data does not the final number make. The entire point of the CPI is to look at price changes across several areas that directly impact consumers, and when some of the most volatile factors are down, it’s probably time to pay attention. As CNBC reports:

Energy prices fell 5% for the month, led by a 10.6% slide in the gasoline index. However, those declines were offset by increases elsewhere.

The food index increased 0.8% in August and shelter costs, which make up about one-third of the weighting in the CPI, jumped 0.7% and are up 6.2% from a year ago.

Medical care services also showed a big increase, rising 0.8% on the month and up 5.6% from August 2021. New vehicle prices also rose, increasing 0.8% though used vehicles fell 0.1%.

Ongoing jumps in pricing across these categories are why the conversation right now is about trending inflation. It’s not just this month’s reading and it’s not just about the common culprits.

The Fed is now even more likely to deliver a significant rate hike.

Consistent rate hikes seemed to be just what the doctor ordered… according to the Fed. They have consistently issued significant hikes over the past several months in an attempt to curb inflation. Even before this, it was largely expected that they would issue another significant hike, but with inflation coming in hotter than expected, that hike seems all but certain.

??BREAKING:

*FED FUNDS FUTURES NOW PRICING 19% CHANCE OF 100 BP FED RATE HIKE, 81% CHANCE OF 75 BP HIKE AT SEPT MEETING, FOLLOWING CPI pic.twitter.com/LXPUhbV4jL

— Investing.com (@Investingcom) September 13, 2022

Another rate hike will probably be felt most keenly in real estate, as mortgage rates – previously expected to settle – respond to the hike. It is worth noting, however, that the markets tend to price in expected Fed maneuvers, which are arguably more predictable than CPI numbers.

The stock market, as ever, is reactionary when caught off guard.

In most cases, the stock market will ease in a certain direction when particular data shifts are expected, whether that be up or down. The problem comes when a shift in data surprises the analysts. The markets then become more volatile. Today, so far, has been no exception.

Stocks clearly not liking hotter CPI report pic.twitter.com/930P1tg2MH

— Liz Ann Sonders (@LizAnnSonders) September 13, 2022

To be clear, though, those sorts of drops are usually not durable. The market recalibrates as people look to other data – like solid jobs data – to assuage their fears.

Main Street reactions and Wall Street reactions are two very different things.

Market analysts (at least, the good ones) tend to look at the bigger picture when it comes to calculating economic shifts. Even if they panic in the short term, there is usually enough debate over what data means that exceptionally large market shifts are relatively rare.

Main Street is a little different. Broadly speaking, many will turn to the stock market as a barometer of economic health. Inflation, however, is the undercurrent that sows doubt. The typical consumer probably won’t be able to tell you the exact CPI numbers. They may not even know the technical direction of the data. But their wallet does, and that can change behavior.

As inflation surged earlier this year, consumer confidence began to plummet. The stock market was soaring. Jobs reports were robust. But when it came to household expenses, consumers were still feeling wary. When confidence drops, so does spending, causing a ripple effect that can impact every single industry.

In theory, basic supply and demand theory indicates that a lack of spending – or decrease in demand – could lower the prices behind the CPI. In the mid- to long-term, that is likely true. But after an onslaught of vexing Q2 earnings reports, sustained decreases in spending could spell the kind of economic trouble the current climate is not prepared to handle.

Developing news stories complicate projections.

Slow news days aren’t really a thing. Days when people aren’t paying attention to the news they should most definitely are.

We wrote recently about the threat posed by an impending railroad strike, which is now projected to cost the U.S. economy over $2 billion a day if realized. The accompanying rise in the cost of goods is certainly not going to help inflation. Nurses striking in Minnesota could portend additional strikes in other states, which won’t help the contributing healthcare costs in CPI calculations. And though the chaotic political headlines aren’t directly tied to CPI, that volatility – paired with a probable spike in partisan fervor ahead of this November’s midterm elections – already has people (rightfully) nervous about what kind of headlines might come next.

The truth is that it’s impossible to really know what will come next, no matter what the talking heads on TV might say. Instead, it is prudent to continue to consult with your financial planner to assess the best next steps for your risk tolerance levels.