With the Federal Open Market Committee (FOMC) set to meet next week, the August Consumer Price Index (CPI) report released this week was a big deal. It showed that inflation has increased for the second straight month, which has caused concerns about the possibility of additional interest rate increases. As expected, most headlines were negative, suggesting the Fed still has work to do. But as we always say, getting past the headlines and digging into the details is imperative. So, what will this most recent report mean? Let’s take a look.
First off, where do we find ourselves after the August report? Headline inflation rose to 3.7% in August, driven by a jump in energy costs, illustrating the potential obstacles to squeezing inflation out of the economy without a sharper slowdown. August was up versus a 3.2% increase in July and 3.0% in June. On its face, this seems discouraging, no doubt. But remember, before the low in June, inflation had declined for 12 straight months. It dropped from a peak of over 9% in 2022, and excluding June and July of 2023, August was the lowest reported number since March 2021. And while the back-to-back increase is not what anyone wanted to see, it still reflects considerable progress.
And speaking of progress, Core CPI, which the Fed is more focused on as it excludes volatile energy and food prices, continues to show signs that it is moving in the right direction. Where headline CPI has been up the last two months, Core CPI has continued to decline, down to 4.3% in August from 4.8% in June. While Core CPI remains elevated due to the extremely slow-moving measure of ‘shelter,’ which still accounts for almost all of the year-over-year increase, the August increase reflected higher costs for items such as airfares and vehicle insurance as well.
So what will this mean for next week’s Fed policy decision? The monthly core report probably ensures that Federal Reserve officials remain on track to hold interest rates at their upcoming meeting. However, more data is needed to settle the broader discussion on whether there’s a need to increase them later this year. The good news is there is a two-month gap between next week’s Fed meeting and the subsequent conference. This will give participants multiple data releases to assess economic conditions before deciding what to do next. And if there is one thing we know, at least regarding interest policy decisions, the more data, the better.
Economy
- It was a volatile, up-and-down week in U.S. equity markets that ended mostly flat, with the S&P 500 down -0.2%, the Nasdaq down -0.4%, and the small-cap Russell 2000 down -0.2%. There were a handful of major reports throughout the week, but markets seemed to move independently.
- Producer prices in the U.S. increased 0.7% in August, the highest level since June 2022, and exceeded market expectations of 0.4%. Prices for goods advanced, driven by a 10.5% surge in energy costs. Meanwhile, service prices increased 0.2% due to rising transportation and warehousing costs (1.4%).
- Core producer prices increased 0.2%, following a gain of 0.4% in the previous month. On an annual basis, the core rate eased to 2.2%, marking its lowest level since January 2021.
- U.S. retail sales advanced 0.6% mom in August 2023, higher than a downwardly revised 0.5% rise in July and beating forecasts of a 0.2% advance. The data points to robust consumer spending despite high prices and borrowing costs.
- The University of Michigan consumer sentiment for the U.S. fell to 67.7 in September from 69.5 in the previous month, retreating further from the near-two-year high of 71.6 in July and missing market estimates of 69.1.
Stocks
- U.S. equities were in negative territory. Technology and Industrials led the decline, while Utilities and Consumer Discretionary outperformed. Value stocks led growth stocks, and large caps beat small caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased six basis points to 4.32% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led for the week, followed by corporate bonds and government bonds.
