August CPI: Pain at The Pump

The consumer price index (CPI) report for August came in hotter than expected on Wednesday. Higher gasoline costs were the major reason.

As Claude Rains famously said: “Round up the usual suspects.” In this case, they’re Russia and Saudi Arabia.

The U.S. Bureau of Labor Statistics reported Wednesday that the CPI rose 3.7% in August from a year earlier, up from 3.2% in July and higher than the consensus estimate of 3.6%.

On a monthly basis, prices increased 0.6% last month, in line with the estimate and following a 0.2% rise in July. The August number marked the CPI’s biggest monthly increase this year.

The index for gasoline was the largest contributor to the monthly all items CPI increase last month, accounting for over half of the increase. The CPI’s gasoline index jumped 10.6% in August from the previous month, dramatically higher than the 0.2% gain in July.

The average national price of regular gasoline in the U.S. currently stands at $3.84 per gallon. U.S. gas prices over the last year are among the highest since 2018.

The “core” CPI, excluding the volatile food and energy components, rose 4.3% year-over-year, in line with the estimate and down from 4.7% in July. On a monthly basis, core CPI rose 0.3% versus the 0.2% estimate.

Annual inflation has substantially moderated after hitting a 40-year high of 9.1% in June 2022. But lowering inflation closer to the Fed’s 2% target is proving difficult. Elevated energy costs are the biggest inflationary factor, by far.

OPEC+ has curtailed crude oil production and supplies remain tight. Oil prices have surged, benefiting energy assets but hurting consumers. The U.S. benchmark West Texas Intermediate (WTI) hovers at $89 per barrel. Brent North Sea crude, on which international oils are priced, hovers at $92/bbl.

These oil price levels are near 10-month highs. Not surprisingly, the energy sector has been outperforming in recent months, especially shares of the major exploration and production companies. In fact, their shares have run up so far and so fast, a consolidation is probably in the cards.

Traders are bracing for a pullback in energy stocks as technical gauges, e.g. the Relative Strength Index (RSI), indicate overbought levels.

Geopolitics and your neighborhood gas station…

The International Energy Agency asserted in a report Wednesday that the decision in early September of OPEC+ to extend production cuts until the end of the year will probably cause a substantial supply shortfall for the rest of 2023, keeping prices higher at the pump.

The initiative to tighten the oil spigots has come from cartel members Saudi Arabia and Russia. These two major oil producers have an on again, off again relationship that’s…on again.

The IEA report stated: “The Saudi-Russian alliance is proving a formidable challenge for oil markets…The extension of output cuts by Saudi Arabia and Russia through year-end will lock in a substantial market deficit through 4Q23.”

The House of Saud and Russian President Vladimir Putin are succeeding in their efforts to punish their perceived adversaries, in particular the Biden administration. The Saudis resent America’s moralizing on human rights, and Putin is continuing his long-running campaign to destabilize the West.

Sanctions due to the Russia-Ukraine war are another motivating factor for Putin. Of course, generating oil revenue is paramount, but discomforting U.S. and European leaders is a bonus.

The argument made by political partisans that U.S. energy policy and efforts to encourage renewables are largely to blame for high gasoline prices is contradicted by the facts. Blaming elected politicians for high gas prices is nothing new, and both sides do it. But gasoline prices are mostly dictated by oil prices and oil prices are dependent on supply and demand.

The following chart tells the CPI story for August. If you exclude food and energy, the inflation picture is more positive:

To be sure, goods prices have been falling as COVID-induced supply chain bottlenecks have eased. But the cost of services, notably car repairs and recreation, have surged due to wage growth.

The hotter-than-expected CPI report for August will loom large over the Federal Reserve’s meeting on monetary policy next week. Fed Chair Jerome Powell has made it clear that the Fed will adhere to its inflation target of 2%. That said, the markets don’t seem too worried about the latest CPI reading.

In the wake of the CPI report Wednesday, U.S. stocks closed mixed as follows:

  • DJIA: -0.20%
  • S&P 500: +0.12%
  • NASDAQ: +0.29%
  • Russell 2000: -0.78%

According to the CME Group’s FedWatch tool, the odds of the Fed standing pat on rates next week currently stands at 97%.

However, inflation is just hot enough to keep alive the discussion about another possible rate hike later in 2023.

We’ll get a clearer picture on inflation and its consequences with the retail sales and producer price index (PPI) reports, due on Thursday. In particular, we’ll see if higher gasoline prices are prompting consumers to pull back on discretionary spending.

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John Persinos is the editorial director of Investing Daily.

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