Numbers on gas prices and core inflation douse hopes for let-up in price pressures
For a market hoping for good news on U.S. inflation, yesterday’s report from the Bureau of Labor Statistics was about as welcome as a gut punch.
“In a lot of ways, the report was a worst-case scenario for what I would call the consensus on inflation,” Bryce Gill, economist at First Trust, told Wealth Professional after the announcement.
Before now, gas prices have been a point of focus for some optimists, who maintained that inflation pressures will ease as fuel costs come down. But even as the latest report out of the U.S. showed a steep 10.6% drop-off in gas prices, headline inflation clocked in at 8.3%, a minor dip from 8.5% in July.
Others have found hope by focusing on core inflation, arguing that it represents a better measure of price movements as it strips out the volatility of food and energy prices. That argument was also torpedoed as U.S. core inflation rose by 0.6% in August to reach 6.3% on a year-on-year basis.
“It's not just gas prices, and food, and these volatile categories that are driving [prices up]. … We're seeing this in broad-based ways across the spectrum” Gill says. “I think people are just realizing that maybe it’s not the best idea to just have a best-case scenario and focus all of your analysis on oil prices.”
Supply-chain pressures, which have been a major driver of inflation for months, are starting to ease as shown by statistics on container ships and freight rates to the U.S. But Gill argues that the post-pandemic shift in consumption from goods toward experiences are likely to create another lift to prices.
“Services – which is the majority of what most Americans and first-world countries spend their money on – are starting to drive the numbers,” he says. “To the degree that service prices spiral out of control, and if we get back to 70% of spending going to services, it's hard to not see that component of CPI continue to be stubbornly high.”
Personal income in the U.S., he says, is currently running far above the long-term trend. Job gains and wage increases have meant people have more cash in their pockets – at least in nominal terms – which has led to sustained consumer demand. The upshot has been a continued boom in earnings over the past two quarters even in the face of negative GDP.
The latest inflation figures have cemented the chances of another 75-basis-point hike by the Federal Reserve next week. A full-percentage-point increase is also now on the table, Gill adds, as evidenced by a 15-bp surge in the 10-year Treasury yield following yesterday’s report.
“Interest rates have been the biggest contributor to volatility and this bear market in stocks,” Gill says. “To the extent that inflation is going to be this big, uncertain factor, I think markets are going to continue to be very volatile.”
