A person shops at a supermarket as inflation impacted consumer prices in New York City, June 10, 2022.

Andrew Kelly | Reuters

For most of the year, the inflation narrative among many economists and policymakers was that it was essentially a food and fuel problem. Once supply chains eased and gas prices eased, the reasoning went, this would help lower food costs and in turn ease price pressures across the economy.

However, August’s CPI figures put that narrative to the test, with widening increases now suggesting that inflation may be more stubborn and firm than previously thought.

CPI excluding food and energy prices — known as core inflation — rose 0.6% for the month, double the Dow Jones estimate, leading to a 6.3% year-on-year increase in the cost of living. Including food and energy, the index rose 0.1% on a monthly basis and a robust 8.3% on a 12-month basis.

Just as importantly, the source of the gain wasn’t gasoline, which fell 10.6% for the month. While the fall in energy prices over the summer helped dampen inflation headlines, it failed to quell fears that inflation will remain a problem for some time to come.

The expansion of inflation

Instead of fuel, it was food, shelter and medical services that drove up costs in August, levying a costly tax on those who could least afford it and raising important questions about where inflation is headed from here.

“Core inflation numbers were hot across the board. The breadth of sharp price increases, from new vehicles to medical services to rent increases, everything was sharply up,” said Mark Zandi, chief economist at Moody’s Analytics. “That was the most disturbing aspect of the report.”

In fact, new car prices and medical supplies each rose 0.8% over the month. Housing costs, which include rent and various other housing-related expenses, make up almost a third of the CPI weight and rose 0.7% on the month.

Grocery costs were also a nuisance.

The Home Grocery Index, a good predictor of food prices, rose 13.5% last year, the largest such increase since March 1979. Prices of items like eggs and bread continued their meteoric rise, fueling household budgets further charged.

For medical benefits, the 0.8% monthly increase is the fastest monthly increase since October 2019. Vet costs increased 0.9% month-on-month and 10% year-on-year.

“Even things like clothing prices, which often go down, have gone up a bit [0.2%]. My view is that if they stay at these lower oil prices and assuming they don’t bounce back, it will lead to broad inflation moderation,” Zandi said. “I didn’t change my inflation forecast to go back to it [the Federal Reserve’s 2% target] to early 2024, but I’d say I stand by that forecast with less conviction.”

Why everyone is so obsessed with inflation

On a positive note, things like plane tickets, coffee, and fruit have all come down in price again. A survey released earlier this week by the New York Fed showed consumers are less concerned about inflation, although they still expect the rate to hover at 5.7% a year from now. There are also signs that supply chain pressures are easing, which should at least be disinflationary.

Higher oil possible

But about three-quarters of the CPI stayed above 4% year-on-year with inflation, reflecting a longer-term trend that belies the idea of ​​”temporary” inflation that the White House and Fed had been pushing.

And low energy prices are not a matter of course.

The US and other G-7 countries say they intend to introduce price controls on Russian oil exports from December 5, potentially inviting retaliatory action that could lead to price hikes later in the year.

“Should Moscow halt all natural gas and oil exports to the European Union, the United States and the United Kingdom, then there is a strong possibility that oil prices will retest the highs reached in June and move the average price of ordinary gas significantly higher again currently $3.70 per gallon,” said Joseph Brusuelas, chief economist at RSM.

Brusuelas added that even if housing is in a slump and a possible recession, he thinks the price declines there are unlikely to carry through as housing has “about a good year to go before the data in this critical ecosystem”.

With so much inflation in the pipeline, the big economic question is how far the Fed will go with raising rates. Markets are banking on the central bank raising interest rates by at least 0.75 percentage point next week, which would take the fed funds rate to its highest level since early 2007.

“Two percent stands for price stability. That’s her goal. But how do they get there without breaking something,” said Quincy Krosby, chief equity strategist at LPL Financial. “The Fed is not done yet. The road to 2% will be difficult. Overall, we should see inflation continue to fall. But at what point do they stop?”

Concerns about acceleration in core inflation are growing