United States: Pump Prices Bump Up Inflation

Higher headline inflation obviously isn't good news at this juncture. But this uptick was clearly driven in large part by the August surge in gasoline prices. Lower prices at the pump had recently been supporting disinflation. Then the year-over-year decline in gasoline prices slowed from nearly 20% in July to “just” 3% in August. Fortunately gas prices have started to come down from their August peak, so hopefully last month's uptick was just a blip.

The 12-month change in core CPI, which strips out food and energy, is a better gauge. Core CPI fell to 4.3% in August, its lowest level in nearly two years. After posting two straight 0.2% monthly increases, it did edge up 0.3% month-over-month in August—more than the consensus forecast for another 0.2% rise. But goods prices excluding food and energy were down for the third consecutive month in August, meaning the pressure continues to come from the services side. Transportation services in particular are on the rise, including airfares—which spiked 4.9% after three months of declines—and auto insurance, which was up 2.4%. On the flip side, growth in shelter costs slowed slightly with a 0.3% gain, the smallest monthly increase since August 2021. Because shelter makes up such a large share of CPI, further declines in this component would help bring down headline inflation. But other service components also need to do their part. The inflation measure closely watched by the Fed—the three-month change in services excluding shelter and energy—also rose slightly in August and is back above 2%.

Headline inflation picked up in August, but the acceleration was largely due to a surge in gasoline prices, which already seem to be levelling off. Still, it’s a reminder that the return to more modest inflation won't be a straight path. Fortunately core inflation continues to moderate, though there was some disappointing news on this front in today’s report. The Fed will need to keep a close eye on this going forward. A rate pause is still in the cards, but the US economy will likely need to slow further to bring inflation closer to the official target.