Commentary Directory

US Consumer Prices Surge in August Driven by Energy Costs

Jacob Hess
September 13, 2023

In August, the US witnessed a significant uptick in consumer prices, marking the fastest monthly growth since June 2022. The Consumer Price Index (CPI) rose by 0.6% MoM and 3.7% YoY, a noticeable acceleration from the 3.2% YoY recorded in July.

From BLS

A primary driver behind this surge was the energy index, which reversed its declining trend observed in Q2 2023. Energy prices soared by 5.6% MoM. Breaking it down, the gas index witnessed a substantial jump of 10.6% MoM. In contrast, electricity and natural gas indexes saw marginal increases, with rates of 0.2% MoM and 0.1% MoM, respectively. Fuel oil prices also experienced a significant rise, increasing by 9.1% MoM. On the food front, inflation continued its trend of modest gains, registering a growth of just 0.2% MoM. Both grocery prices and food away from home prices reflected this slow pace, with increments of 0.2% MoM and 0.3% MoM, respectively.

While the headline CPI showed a robust growth, the core CPI (ex-food and energy) recorded a more subdued monthly gain of 0.3% MoM. Goods inflation, excluding energy, remained particularly low, with prices declining by -0.1% MoM. This marked the third consecutive month of decline. A significant contributor to this drop was the used car and vehicle index, which decreased by -1.2% MoM. Other indexes in this segment presented a mix of muted gains or slight declines. Services CPI saw an increase of 0.4% MoM, but its annual pace decelerated by 0.2 percentage points, settling at 5.9% YoY. The shelter index, a consistent contributor to the core CPI's monthly gain, rose by only 0.3% MoM, marking its smallest gain this year.

There does seem to be a lot of noise in CPI data with many different segments seeing mean reversions and just in general volatile swings. These are often ignored by the Fed which is why the special “Supercore” aggregate can be important to look at. The Supercore CPI, which excludes food, shelter, energy, and used cars, grew by 0.4% MoM and 3.2% YoY in August. For comparison, in July, this aggregate was flat MoM and up 3.4% YoY. Through all the noise, it looks like the trend of disinflation is being maintained. The significant downtrend in the monthly paces of core CPI growth is another strong indicator of this. Over the last three months, it has grown at about 0.23% MoM which is an annual rate of just under 2.8% YoY.

The Fed will be looking through the volatility in its next September meeting. The core messages of disinflation should shine through to them, but that may not be enough to keep them from hiking one last time. Key employment indicators have slowed, which will also be encouraging in the fight against inflation, but many FOMC members have already indicated their preference for one more 25 basis point increase in the Fed funds rate. It will be a close call, however, as there are many reasons to maintain the pause.