August CPI forecast shows more good news on inflation, except for higher gas prices

The August 2023 CPI report is expected to show that after a summer of better inflation news, U.S. consumer prices are rising at half the pace they were a year ago — even as prices rise at the gas station. .

However, with the economy remaining stronger than most people expected, investors and the Federal Reserve will likely have to wait some time before inflation returns to acceptable long-term levels.

“It’s quite clear that inflation is falling, both at the headline and core levels,” says Eric Winograd, chief economist and strategist at AllianceBernstein. “But reaching the Fed’s long-term target will take time.”

AllianceBernstein does not expect inflation to fall to the Fed’s 2% target this year or even early next year.

Improving the core CPI

For the August report, the Consumer Price Index is expected to show a 3.6% increase in inflation from year-ago levels, according to FactSet. This is well below last summer’s peak of 9.1%, but higher than last month’s reading of 3.2%.

Meanwhile, the core CPI, which excludes volatile food and energy costs, is expected to show an annual increase of 4.3%, down from 4.7% in July.

“Core inflation is much more important than headline numbers,” says Winograd. “If the following is consistent with expectations, that should take us to just under 4.5% core inflation year-on-year – but that is still a long way from home.”

In Winograd’s view, the usual suspects – persistent economic strength, a strong services sector, and a robust housing market – are keeping core inflation high.

“The Fed is in a data-driven mode,” he says. “If core inflation continues to decline gradually, as the Fed expects, it will leave interest rates as they are.” But if monthly core inflation starts rising again, which Winograd says is unlikely, “then the Fed may find itself forced to raise interest rates.”

Highlights of the Consumer Price Index report for August

• The CPI is expected to rise 0.6% in August after rising 0.2% in July.
• The core CPI is expected to rise 0.2% for the third straight month in August.
• On an annual basis, the Consumer Price Index is expected to rise by 3.6% in August after rising by 3.2% in July.
• On an annual basis, the core CPI is expected to rise 4.3% in August after rising 4.7% in July.

With the August report, economists expect a wide gap between the overall increase and the core reading, largely due to higher gas prices.

Economists at Bank of America expect a 5.9% jump in energy prices to lead to an overall increase of 0.6%. They point to data from AAA showing that retail gasoline prices jumped 6.6% month-over-month in August. This increase reflects higher crude oil prices due to supply concerns. Bank of America expects the core CPI to rise 0.2% from July.

Inflation of basic services remains a focus

The Federal Reserve has announced that it is more concerned with the prices of basic services in the fight against inflation. “Core services inflation, which remains high, is actually the name of the game for the Fed right now,” says Winograd. “The Fed is less subject to other deferred areas such as housing-related rates.”

Housing inflation has remained high, but, as Winograd explains, rental prices have been known to lag, because rents typically last 12 months before rents rise or fall.

For the August report, economists at Bank of America expect basic services to rise 0.4% compared to July, with housing inflation increasing 0.4%. “While we expect some moderation in rents and landlord equivalent rent prints compared to July, it is likely to be very modest,” they wrote. “However, over time, we expect housing inflation to ease a step further as rental inflation measures continue to record unusually small rent increases. This alone should help keep inflation under control over the coming months.”

“A large part of the expected rise in overall inflation is simply due to base effects,” Winograd adds. We measure price changes over the past year, so things that happened several months ago are still part of the calculation. At that time, prices were still very high, so there would be a time lag between when month-over-month inflation looks consistent with 2% levels versus when year-over-year inflation starts to appear flat.