September 27, 2023
The August inflation report was recently released. The Consumer Price Index (CPI) data revealed that inflation increased month-over-month from July 2023 to August 2023. While this trajectory may not align optimally with the Fed's goal of 2%, it is worth noting that current inflation levels are far less now compared to earlier this year and last year at this time. Overall, the CPI rate has fallen to 3.7% from the 9.1% peak in June of 2022.
Consumer Price Index
CPI measures the average cost of goods and services that a consumer experiences and is the most well-known measure of inflation. CPI is generally considered to be a “lagging indicator” for inflation since it measures inflation after it appears.
12-Month CPI Numbers
The “all items” index increased 3.7 percent for the 12 months ending August, a larger increase than the 3.2-percent increase for the 12 months ending in July. The “all items less food and energy” index rose 4.3 percent over the last 12 months. The “energy” index decreased 3.6 percent for the 12 months ending August, and the “food” index increased 4.3 percent over the last year.
Month-Over Month Flare-Up
There have been a number of hot spots that have recently flared up, specifically energy prices. The index for gasoline was the largest contributor to the monthly increase, accounting for over half of the increase. That increase should be temporary, economists said. On average, energy prices only make up roughly 7.5% on average of CPI.
Shelter costs represent over 30% of CPI. Year-over-year, shelter costs increased for the 40th consecutive month. However, shelter costs actually came down month-over-month in the August report, which is a positive indicator.
This year, we are on record pace for construction and completion of new multi-family housing. This scenario is helping to reduce shelter costs because of the massive influx of new supply coming available. As this continues to work through the system, it will reduce inflationary pressures.
The Fed typically responds to inflation by raising the cost of borrowing — hiking interest rates. It is the responsibility of the Fed to provide a safe, flexible and stable monetary policy without pushing the economy into a recession – a very delicate balance. The Fed normally meets eight times a year to update its economic projections and longer-term forecasts.
The increase in CPI that we saw in the August report is likely temporary. However, we may experience some near-term market choppiness. Our Covenant Wealth Strategies Investment Team is closely paying attention to market signals - including both fundamentals and technicals – in an effort to make wise and appropriate choices in our investment portfolios.
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