Inflation Update :: FOMC Preview

"We are navigating by the stars under cloudy skies" -Jerome Powell

CONSUMER PRICE INDEX

The consumer price index (CPI) rose 0.6% in August, following a 0.2% increase in July. The headline CPI increased 3.7% year-over-year. The primary reason for the uptick in the headline inflation rate in August was the increase in gasoline prices. According to GasBuddy, the average price for a gallon of gas increased from $3.50 at the start of July to $3.80 at the end of August. Shelter costs also continue to add to the pace of inflation, increasing for the 40th consecutive month. The core CPI, which excludes the volatile food and energy components, increased 0.3% in August, following a 0.2% rise in July. On a year-over-year basis, core CPI rose 4.3%. The year-over-year core CPI rate peaked at 6.6% in September 2022 and has been steadily decreasing for eleven months. The disinflationary trend in core CPI remains intact. The three-month annualized core CPI rate decelerated to 2.4% in August. We expect the disinflationary trend in the core inflation rate to continue through year-end.

Headline CPI:

+0.6% seasonally adjusted in August, following +0.2% in July

+3.7% year-over-year

+4.0% 3-month annualized

Core CPI: (excludes food and energy)

+0.3% seasonally adjusted in August, following +0.2% in July

+4.3% year-over-year

+2.4% 3-month annualized

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PRODUCTIVITY AND LABOR COSTS

Labor productivity increased +3.5% in the second quarter of 2023, which helped limit the increase in unit labor costs to +2.2% in Q2. Hourly compensation increased 5.7% during the quarter. Over the last four quarters, unit labor costs rose +2.5%. The second quarter’s unit labor costs figures are in line with Fed Chair Powell’s goal to bring the labor market into balance in an effort to lower the inflation rate toward the Fed’s 2% target level.

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SERIES I SAVINGS BOND

The next Series I bond inflation adjustment will be announced on November 1st, 2023. The inflation component will be determined by the realized change in CPI between the six months from March 2023 through September 2023. We know the rate of change between the five months from March 2023 through August 2023 is 1.72% semi-annual or 3.44% annualized. Therefore, the November 1st Series I bond inflation adjustment will almost certainly be higher than the current 1.69% semi-annual Series I bond inflation adjustment.

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FEDERAL OPEN MARKET COMMITTEE

The Federal Open Market Committee (FOMC) is scheduled to meet next week on September 19th and 20th. We expect the FOMC will hold the federal funds rate unchanged at the current 5.25% to 5.5% target range. Following the meeting, the Fed will publish an updated Summary of Economic Projections (SEP), and Chair Powell will host a press conference. The most recent SEP was published in June. The table below shows the central tendency of those projections, which excludes the three highest and three lowest projections for each variable.

We will be watching the new SEP closely to see how many FOMC members expect another rate increase in 2023. Only two meetings remain this year on October 31st - November 1st and December 12th - 13th. The June SEP included the following “dot plot” which illustrates the fed funds rate forecast for each FOMC member in December of 2023, 2024, and 2025. As you can see, most FOMC members forecast a higher fed funds rate at year-end followed by rate cuts in 2024 and 2025.

Below are the latest CME FedWatch meeting probabilities for the federal funds rate. Almost no one is expecting a rate hike next week.