Consumer price index: Volatility in energy and gas makes price stability elusive

REAL ECONOMY BLOG | October 12, 2023

Authored by RSM US LLP

Volatility in energy and gasoline prices, along with stubborn housing and rent costs, were the major drivers of inflation in the September consumer price index.

Both illustrate the difficulties in restoring price stability, and given growing risks to oil prices linked to the outbreak of hostilities in the Middle East, that challenge has only grown.

But pricing dynamics captured since the September CPI survey was conducted point to at least a partial reversal of energy and gasoline costs.

For this reason, we do not make too much of the monthly gain in top-line inflation to 0.4% and the second consecutive year-over-year reading of 3.7%.

We expect top-line data to ease as the pace of rent increases moderate and the October and November surveys capture the declines in oil and gasoline prices since the middle of last month.

On a month-over-month basis, the core inflation rate, which excludes food and gasoline, increased by 0.3%, On an annual basis, that core rate advanced by 4.1%. Core services excluding shelter that feed into wage expectations eased to 3.74% on a year-over-year basis, which should continue to extinguish fears of a wage-price spiral.

This September inflation data will not change the path of policy at the Federal Reserve, which appears to be on hold with rate hikes in the near term.

We anticipate that the Federal Reserve will look though recent volatility in oil prices if the conflict in the Middle East does not spread to include direct action against Iran and its oil production.

We do not think the Fed should or will hike its interest rate further because of the lagged impact of past rate hikes and the resetting of the rate curve higher. The higher rates have led to a tightening in financial conditions and reduced lending, and are almost certain to cause economic activity to slow into the end of the year.

The major driver of pricing in September was the 2.3% increase in energy commodities and 2.1% rise in gasoline prices.

Although that captures pricing dynamics during the September sampling period, it does not capture the full picture of the past month. West Texas Intermediate, the North American oil benchmark, has fallen by 9.5% since its recent peak on Sept. 27. Yet it stands 2.3% above its closing price on the eve of the Hamas attack on Israel, which is illustrative of placing too much policy emphasis on volatility in commodity markets.

One interesting development that has not been given enough attention over the past month is that the national price of regular unleaded gasoline prices is down approximately 6% since Sept. 17 and continues to decline.

While volatility in global oil prices will continue to be linked to the risk of a wider conflict in the Persian Gulf, domestic gasoline prices are poised to decline further in the coming days and weeks which will provide further relief to top-line inflation in October and November.

The data

Outside of the volatility in energy and gasoline prices, higher costs of housing and rents continue to support elevated inflation readings.

The cost of housing increased by 0.6% in September and was up by 5.6% from a year ago. Shelter costs and the policy-sensitive owners’ equivalent rent both increased by 0.6% on the month and by 7.1% and 7.2%, respectively, on a year-over-year basis.

We expect all of these figures to ease significantly in the coming months and well into next year based on other real-time high frequency data.

Service prices rose by 0.6% on the month and by 5.2% from a year ago, while services prices excluding energy advanced by 0.6% monthly and by 5.6% over the past year.

Food prices increased by 0.2% monthly and 3.7% annually, while the broader metric of food and beverages increased by 0.3% and 3.7% over that same time.

Apparel costs declined by 0.8% on the month were up by a stable 2.3% on the year.

Transportation prices increased by 0.3% on the month and were up 2.4% from one year ago. New vehicle costs increased by 0.2% and 2.5% while used auto prices declined by 2.5% monthly and by 8% over the past year. Airline costs increased by 0.3% on the month and by 13.4% over the past year.

Medical care prices increased by 0.2% on the month and by 1.4% since September last year.

Recreation costs advanced by 0.4% monthly and by 3.9% over the past year, while education and communication costs increased by 0.1% monthly and 1.4% from one year ago.

The takeaway

Gains toward price stability remain elusive as the 1.5% increase in overall energy costs and stubborn housing inflation were the major drivers of inflation over the past month.

We anticipate that inflation increases will continue to moderate though the remainder of this year and next year as an easing in housing costs are fully captured by the consumer price index.

The major risk to price stability is the conflict in the Middle East and a wider conflagration that would include Iran and its oil production and refining facilities.

Despite those risks, the price of domestic gasoline continues to fall, and that should provide relief to top-line inflation in the coming months.

This article was written by Joseph Brusuelas and originally appeared on 2023-10-12. Reprinted with permission from RSM US LLP.
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