This week we got two additional pieces of data that will instruct the Federal Reserve’s rate path when they meet next week. Both PPI and CPI data can now be added to the labor statistics of last week to draw some inferences as to the outlook for interest rates.
CPI increased 0.4 percent in August with the 12-month CPI now at 2.9 percent. August numbers were the highest increases in the last six months. The month was driven by increases in energy, most notably gas prices, but year over year both energy broadly and gas specifically are still down over 6 percent. However, while electricity and gas were down in the month, they are still the “hottest” numbers year over year, with electricity up over 6 percent and gas over 13 percent. So, it’s hard to discern a pattern over the last two months. Food also increased in the month, both at home (0.6 percent) and away from home (0.3 percent) leading to year-over-year gains of 3.2 percent and 3.9 percent, respectively. This could indicate the beginning of the flow-through from tariffs, as goods prices which had been on the decline prior to this point are now showing increases.
Core services also experienced growth during the month, rising from lower levels observed between March and June. Shelter, the key component, rose 0.4 percent and is up 3.6 percent year over year. Shelter has been the stickiest inflation number, while there was some slowing noted earlier in the year, this latest increase is not great news.
As for this week’s PPI data, the producer price index (the Federal Reserve’s preferred indicator on inflation since it takes the whimsy of the consumer out of the equation), prices for final demand were up 0.1 percent in August which was the fourth consecutive advance. Stripping out food and energy, the index was up 0.3 percent. August final demand fell 0.2 percent, the largest decline since April.
These two indicators taken together do provide a reason for the Federal Reserve to be a bit more cautious, versus just looking at the labor/employment data. The last unemployment report showed declines in eight of the 13 major private sector industry groups, with healthcare and social assistance services the only standout areas for job increases. The economy added only 22,000 jobs in August as the overall unemployment rate ticked up to 4.3 percent, which is a nearly four-year high. After the labor report, the market had priced in both a) more rates cuts through the end of the year and b) a higher probability of a 50 bp cut next week. This data seems to put that narrative back several steps.
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