Energy Costs to Resume Their Threat

• Topline gauge of consumer prices resumed gains in September 2022, rising 0.2% for the month
• The Core Consumer Price Index (CPI), less Food & Energy, maintained a +0.6% month-over-month pace in September 2022
• Housing continues to put upward pressure on inflation, rising at a 9.1% annualized pace for September 2022
• Energy prices posted a third consecutive monthly decline in September 2022, falling by 2.1% for the month

The Consumer Price Index (CPI) for September 2022 was up by 0.2%. This translates to an 8.2% year-over-year pace, down from 8.3% in August. Perhaps more importantly, the September monthly rise equals a 2.6% annualized pace, representing consumer price inflation conditions in the month of September were to be maintained for a one-year period. This metric provides a sense of real-time price trends facing consumers. A great deal of damage to consumer purchasing power has been done by inflation throughout the past 18 months, and the Federal Reserve is fighting against those influences perpetuating through its aggressive monetary policy tightening efforts. The guiding principle for the Fed now seems to be preventing the reignition of an inflationary spiral.

Falling energy prices have been easing the impact of overall inflation on household budgets since July 2022 – with topline CPI having fallen in July and August and bouncing only slightly back into positive territory in September. But removing the impact of normalizing (i.e., declining) energy prices tells a less optimistic story where inflation’s impact is concerned.

Core inflation, which measures consumer prices once volatile energy and food prices are removed, continued to grow at a 7.1% annualized pace in September 2022, still up 6.7% from one year ago and having accelerated versus August’s 6.3% year-ago pace. The recent trend of decline in households’ energy costs may be set for reversal, however, as OPEC decided to cut production at their September meeting which will likely result in rising energy prices in the months to come. Producers will find cause to again pass on their own higher costs to consumers, both for goods production and transportation of those goods to market. And gasoline and home energy bills have already begun to rise after the last few months’ respite from price increases.

What savings consumers might have seen in gasoline and home energy costs from July through September – at least, with respect to the rampant gains accumulated during the first half of 2022 – continue to be offset by rising overall housing costs. The Housing component index of the CPI rose at a 0.7% pace in September 2022, which is down only slightly from August’s 0.8% gain. Housing makes up more than 40% of the CPI measure overall and includes the cost of shelter as well as general housekeeping and utilities costs.

This outsized share of household budgets highlights the impact of continued strong price hikes in housing as it is largely an unavoidable cost across the economy and its large gains are compounding on an already-large base. Existing single-family home sales have fallen throughout the first eight (8) months of 2022 at the fourth-fastest pace over an 8-month period on record (going back to 1968). So not only home prices and mortgage rates but also the cost of maintaining a home has clearly had an impact on consumer demand and the Housing CPI trend looks likely to keep that influence intact into 2023.

Food price gains showed no signs of abating in September 2022. Both the Food at Home and Food Away from Home CPI component indices rose at still strong 8.6% and 11.9% annualized paces, respectively. As noted earlier, the potential for oil prices to again push up the cost of transporting goods to market – including food to grocery store shelves and restaurant pantries – will keep food price growth on the rise over the coming months. Again, an essential outlay for households, food price inflation portends weaker discretionary spending at least during the first half of 2023 – that is, if households refuse to allow their lagging wage growth to succumb to inflation as a disincentive to consumption during the upcoming holiday season.

The Federal Reserve’s monetary policy tightening plans remain aggressive. Their data dependency message will require Core CPI inflation, especially, to ease before any course correction becomes a consideration. Unfortunately, wage growth in the U.S. economy has already begun to fizzle while inflation has remained stubbornly high. The Fed’s “Demand Destruction” aims will only serve to weaken workers’ bargaining positions in the labor market as consumer demand is undercut and businesses see less need to hire in response to slowing demand for their goods and services.

To some extent, this is indeed the Fed’s goal, since labor market tightness has been a key contributor to inflation. Looking ahead, rather than walking a tightrope between a “soft landing” and recession – the risks of the latter outcome now being flat-out glaring – the Fed now faces the potential of killing off the economy’s job creation impetus beyond a simple rebalancing of the labor market in the name of taming inflation