Core Inflation Comes In Hotter Than Expected As Shelter Costs Unexpectedly Rise

Following last month's modest miss in CPI which sparked speculation about a 50bps cut, which was then boosted by the jobs report miss and the near-record downward payrolls revision, moments ago the BLS reported that - as only a handful of Wall Street strategists warned - core CPI (ex food and energy) came in hotter than expected, rising 0.3% MoM vs expectations of a 0.2% print, with all remaining metrics coming in line; to wit:

• CPI 0.2% MoM (or 0.187% unrounded), Exp. 0.2% - in line
• CPI Core 0.3% MoM (or 0.281% unrounded), Exp. 0.2% - hotter than expected

The annual prints:

• CPI 2.5% YoY, Exp. 2.5% - in line
• CPI Core 3.2% YoY, Exp. 3.2% - in line

 That was the 51st straight month of MoM increases in Core CPI, and a new record high.

Looking at the headline CPI data set, the annual CPI increase dropped to just 2.5% from 2.9%, the lowest since February 2021...

... and the core....

.... as goods deflation is stalling and may even print positive in the coming months, while core service inflation remains the biggest driver.

That said, Goods deflation continues to drag overall CPI lower, with energy also adding to the base effect for the first time since early 2024...

For context, Goods prices remained down 1.9% YoY - matching the biggest deflationary impulse since 2004. Services prices continue to rise YoY but at the slowest pace since 2022.

The 3m and 6m annualized CPI rates continue to trend lower (with Energy a particularly volatile factor)

Under the hood, used car prices fell 1.0%, moderating from last month's 2.3% drop, while airline fares jumped 3.9%, a big reversal to last month's bizarre -1.2% drop and a reversal to drops in each of the past 5 months. Car insurance costs jumped another 0.6%, after rising 1.2%; furniture prices dropped 0.3% reversing last month's 0.3% rise.

Here is a more detailed breakdown:

Food:

The food index increased 0.1 percent in August, after rising 0.2 percent in each of the previous 2 months. The index for food at home was unchanged in August. Two of the six major grocery store food group indexes increased over the month while the other four indexes declined in August.

• The index for meats, poultry, fish, and eggs rose 0.8 percent in August as the index for eggs increased 4.8 percent.
• The dairy and related products index increased 0.5 percent over the month.
• The nonalcoholic beverages index fell 0.7 percent in August, after rising 0.5 percent in July.
• The index for other food at home decreased 0.3 percent over the month, the index for fruits and vegetables declined 0.2 percent, and the index for cereals and bakery products fell 0.1 percent in August
• The food away from home index rose 0.3 percent in August, after rising 0.2 percent in July.
• The index for limited service meals rose 0.3 percent and the index for full service meals increased 0.2 percent over the month

Energy

The energy index decreased 0.8 percent in August, after being unchanged in July.

• The gasoline index fell 0.6 percent over the month.
• The electricity index decreased 0.7 percent over the month and the natural gas index fell 1.9 percent in August.

All items ex good and energy

• The shelter index increased 0.5 percent in August:
  • The index for owners’ equivalent rent rose 0.5 percent over the month and the index for rent increased 0.4 percent.
  • The lodging away from home index rose 1.8 percent in August, after rising 0.2 percent in July.
• The airline fares index rose 3.9 percent in August, after declining in each of the previous 5 months.
• The index for motor vehicle insurance increased 0.6 percent over the month.
• The indexes for education and apparel also increased in August.
• The index for used cars and trucks fell 1.0 percent in August, following a 2.3-percent decrease in July.
• The index for new vehicles was unchanged over the month.
• Over the month, the household furnishings and operations index fell 0.3 percent.
• The medical care index  fell 0.1 percent in August, after falling 0.2 percent in July.
• The communication index decreased 0.1 percent in August, as did the recreation index and the personal care index.

Visually:

Perhaps more worrying is the fact that while rent inflation has flatlined, shelter inflation posted its first increase since early 2023!

• August Shelter inflation up 0.43% MoM and up 5.23% YoY vs 5.05% in July
• August Rent Inflation up 0.39% MoM and up 4.97% YoY vs 5.09% in July

And the first monthly increase since March 2023 highlighted:

Last, but not least, and perhaps most ominous of all, is that while inflation refuses to be "killed" even as the Fed is about to start cutting rates, Supercore CPI rose 0.33% MoM, the biggest monthly increase since April, driven by continued acceleration in transportation services, which jumped the most in 5 months.

Finally, money supply growth is reaccelerating...

Which begs the question: how long until the Fed's next easing cycle unleashes the Arthur Burns fed:

Putting it all together:

• Underlying inflation unexpectedly picked up, as core CPI increased 0.3% from July, the most in four months, and 3.2% from a year ago
• Only five of the 65 forecasts in Bloomberg’s survey called for a 0.3% increase in the core CPI. Almost everyone else was at 0.2%, and four had it at 0.1%. The five were right.
• Shelter prices, the largest category within services, climbed 0.5%, the most since the start of the year and the second month of acceleration, defying widespread expectations for a downshift. Owners’ equivalent rent — a subset of shelter and the biggest individual component of the CPI — rose at a similar pace.
• Airfares rose a hefty 3.9% in August after falling for the previous five months while costs for energy and used vehicles fell
• Risk assets pumped and dumped and bond yields rose. S&P 500 futures dropped steeply immediately after the report came out, before paring losses. The yield on 10-year Treasuries advanced two basis points to 3.66%. The dollar wavered.

And while one can stick a fork in the market's hopes for a 50bps rate cut (odds slumped from 30% to 20%... and from 50% last Friday)...

... the question remains: will the Fed really cut rates as shelter inflation inflects higher for the first time since 2023?