August CPI came in slightly hotter than expected, with the Core CPI increasing at 0.28% month-over-month, compared to expectations for 0.15-0.2%. On a headline basis, CPI increased at 0.6%, in-line with expectations. Half of the headline 0.6% increase was driven by gasoline prices. On a year-over-year basis, core and headline CPI increased at 4.3% and 3.7%, respectively. This month's 0.28% annualizes to a core inflation rate of 3.4%, while a 3 month average core rate, annualized, would be 2.4%.
The driver of the miss in core this month was essentially entirely in Transportation Services, so this month's post will be a little more focused on that and why it's probably not a serious cause for concern.
First, let's give a brief overview of our three key "buckets" of costs: goods, services ex. shelter, and shelter. For the month of August, goods contributed -1 bps, shelter contributed 13 bps, and importantly, services ex. shelter contributed 17 bps. Notably, 15 of this 17 bps from "core services" was from this category of Transportation Services highlighted above. More on that in a minute, but here are the charts showing these monthly contributions relative to recent months and also relative to the pre-COVID average.
Before we dive deeper into Transportation Services, a few other things are worth noting. First, as the charts show above, goods continue to behave, and are essentially doing what they were before COVID. Second, shelter's contribution continued to come down, and this month's 13 bps is knocking on the door of the pre-COVID average of 11 bps. Third, looking at the median and average increases on category levels shows continued subdued inflationary breadth, helping to confirm that one category was the "problem child" this month.
Here are some key charts on the category front. As a reminder, SI4 and SI5 are buckets of categories within the CPI, with SI4 representing a basket of 55 goods and services categories that make up about 98% of the core CPI. SI5 represents one level deeper of goods and services categories, with this layer comprising 101 categories of goods and services representing about 77% of the core CPI. Notice how the lines (category averages and medians) remain below the bar (the aggregate core CPI index). This tells you certain categories (in this case, transportation services), are juicing the total index more than you would otherwise expect, and that inflationary breadth remains about where it's been in recent months (which has been good, and about where we want it).
Let's also show the 3 month average chart as well. This tells a similar story.
Just for clarity's sake, let's quickly show charts of each "core services" category to substantiate our claim that Transportation Services is the outlier for the month. To be clear, some categories did accelerate month-over-month away from transportation services, so you'll notice some bars higher this month than in prior months. But the point is the size of the acceleration (in categories like Medical Services or Personal Services, for example) was not enough to really matter.
So what's going on with Transportation Services? One problem we have is that we don't have a complete disaggregation of this line item. Said differently, we don't have all of the components necessary to nicely sum the parts to the total. The best we can do is show how the sub-levels of Transportation Services we do have changed this month. As the charts below show, it wasn't just one sub-category within Transportation Services, but airline fares appears to have contributed an outsized part of the increase. It is also a bit strange how much the SI4 category charts within Transportation Services differ from SI5's (so imagine you the category for car maintenance accelerate, but you saw the components of that sub-category decelerate, and that's essentially what you have this month). This may be another reason to take this month with a grain of salt.
Similar to the charts above, the charts below show the monthly contribution to core CPI (so in this month's case, the contribution from each category to the 28 bps we said core CPI increased for the month). First we'll show aggregate Transportation Services, then we'll do SI4 categories within Transport Services, and then we'll do SI5.
The charts above show it wasn't necessarily one sub-category driving the overall increase in Transport Services, though some (like Public Transportation, a category which includes airfares) were a bigger source of the issue than others. Now let's look at Sub-Indent 5, the next layer deeper of Transport Services.
As noted above, the Sub-Indent 5 charts within Transport Services seem to contradict those in their "parent" categories in that most of them are either flat, or lower this month compared to July. The key exception of course is Airfares. As noted above, airfares are a key component of the Public Transportation sub-category, and make up about 2/3 of the index for public transportation costs. The fact that most of these other transport services categories actually decelerated this month helps support our claim that inflationary breadth remains under control, and broadly in-line with where the Fed wants it.
Bottom line, this month's CPI was a bit disappointing, but it doesn't take away much from the broader trends we've been discussing in prior months. Inflation is coming down, and this month does not change our view that on a "run-rate" basis, inflation is probably knocking on the door of the Fed's 2% target. While there are things on the horizon that could represent headwinds towards further inflationary progress (oil prices have risen, and medical care in the CPI are two things to note), the tailwind from shelter remains "in the pipeline" too. This month is also a reminder of why we need more than one month's worth of data to form a trend. Check back next month to see if August did in fact start some new trends, or if it was a modest deviation from the trends we've seen in prior months.
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