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August CPI Forecast to Show More Good News on Inflation, Higher Gas Prices Aside

Inflation is still well above the Fed’s target, but price pressures are slowly moving in the right direction.

Federal reserve inflation artwork

The Consumer Price Index report for August 2023 is forecast to show that after a summer of better news on inflation, consumer prices in the United States are rising at half the pace they were a year ago—even with a jump in prices at the gas pump.

Yet with the economy remaining stronger than most had expected, investors and the Federal Reserve will likely have to wait a while before inflation returns to acceptable long-term levels.

“It’s pretty clear that inflation has been coming down, both on a headline and core basis,” says Eric Winograd, chief economist and strategist at AllianceBernstein. “But getting to the Fed’s long-term goal is going to take time.”

AllianceBernstein doesn’t expect the inflation rate to fall to the Fed’s target of 2% this year or even early next year.

Core CPI Improving

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

Meanwhile, 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 relevant than the headline numbers,” Winograd says. “If the next — is consistent with expectations, that should bring us a little below 4.5% core inflation year over year—but that’s still a long way from home.”

The usual suspects—continued economic strength, a robust services sector, and a sturdy housing market—are keeping core inflation elevated, in Winograd’s view.

“The Fed is in data-dependent mode,” he says. “If core inflation continues to come down gradually, as the Fed is expecting, then it will leave rates where they are.” But if monthly core inflation starts to tick back up, which Winograd says is unlikely, “then the Fed may find itself having to raise rates.”

CPI vs. Core CPI

August CPI Report Forecast Highlights

  • The CPI is forecast to rise 0.6% in August after increasing by 0.2% in July.
  • Core CPI is forecast to rise 0.2% for the third consecutive month in August.
  • The CPI, year over year, is forecast to rise 3.6% in August after rising 3.2% in July.
  • Core CPI, year over year, is forecast to rise 4.3% in August after rising 4.7% in July.

With the August report, economists are predicting a wide gap between the overall increase and the core reading, largely because of higher gas prices.

Economists at Bank of America expect a 5.9% jump in energy prices to fuel a 0.6% overall increase. They point to data from AAA showing retail gasoline prices jumping by 6.6% month over month in August. This increase reflects a rise in crude-oil prices driven by supply concerns. Core CPI should rise 0.2% from July, Bank of America predicts.

Core Services Inflation Remains in Focus

The Fed has communicated that it cares most about core services prices in the fight against inflation. “Core services inflation, which remains elevated, is really the name of the game for the Fed right now,” Winograd says. “The Fed is less subject to other delayed areas such as housing-related prices.”

Shelter inflation has remained hot, but, as Winograd explains, rent prices are known to lag, since it’s standard for leases to last 12 months before rents rise or fall.

For the August report, Bank of America’s economists look for core services to rise 0.4% from July, with shelter inflation increasing by 0.4%. “While we do expect some moderation in rent and owners’ equivalent rent prints relative to July, it is likely to be very modest,” they write. “That said, over time, we do expect shelter inflation to take another step down given that asking rent inflation measures continue to register unseasonably soft rent increases. This alone should help keep a lid on inflation over the coming months.”

Winograd adds, “A big part of the expected rise in headline inflation is simply due to base effects. We’re measuring price changes over the past year, so things that happened several months ago are still part of the calculation. Back then, prices were still quite elevated, so there will be a time lag between when month-over-month inflation looks consistent with 2% levels versus when year-over-year inflation starts to look consistent.”

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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