A broken record: rising fuel prices drive major economic data readings

Consumer price index

On Wednesday, the consumer price index (CPI) for August came in at expectations, rising 0.6% last month — the largest gain since June 2022. Core CPI increased 0.3% which was slightly above expectations of 0.2%. The largest driver of the increase in headline inflation was gasoline, which jumped 10.6% from July. Comparing headline inflation contributions across categories between July and August, shelter continues to be the largest contributor — now driving approximately 65% of inflation. In recent months, transportation services have become a notable contributor of headline inflation as auto insurance and auto repair prices have both increased by nearly 20% from last year. More expensive airline fares in August, largely driven by a rise in jet fuel cost, also drove the transportation services contribution higher. While the annual contribution of energy has been in negative territory given last summer’s record highs, the breakdown below illustrates how rising fuel prices drove the August headline inflation number up, reflecting the ongoing oil production cuts by Saudi Arabia and Russia.

While there was an uptick in the headline number, the cooling core inflation reading of 4.3% gives the Fed the assurance to hold its federal funds rate steady at 5.25-5.50% at this week’s FOMC meeting.

Producer price index

High energy costs fueled the 0.7% rise in U.S. wholesale prices in August — the largest increase in 14 months. Although this initially caused stocks to edge lower on Thursday morning upon its release, the overall market sentiment was not to be concerned as stocks retreated to morning levels. Comparable to Wednesday’s Core CPI reading, with high energy costs removed, the Core PPI in August of 0.2% reveals a more encouraging trend of inflation.

Retail sales

Last Thursday, August retail sales demonstrated the continued strength of the American consumer. Consumer spending rose 0.6% in August, challenging the concerns that high borrowing costs and depleting savings post-pandemic would tamper consumer spending habits. Like the other economic releases last week, the surge in gasoline prices largely drove this month's retail sales number, accounting for 66% of the increase. Other sales categories displayed moderate gains — notably back-to-school related categories. With strong consumer spending and continued strength in the labor market, Q3 GDP is on track to be very strong. Q4 GDP, however, may prove not as strong with the burden of elevated prices at the pump.

Fuel in focus

Fuel costs continue to make headlines as prices soar amidst short supply and increased demand. On September 5, Saudi Arabia and Russia announced the extension of their oil production costs, reducing the global crude supply by 1.3 million barrels per day. Last week, OPEC member Libya, who has been suffering from a devastating storm, shut down four of its oil export terminals. These various cuts in supply cause concern for the economy. OPEC, on Tuesday, said in its monthly report that Q4 could bring a supply shortfall of 3.3 million barrels per day, marking the biggest deficit since 2007. As a result of production cuts coupled with dwindling recessionary fears, crude prices have continued to rise — last week reaching 10-month highs. Brent crude oil is now reaching above $90 a barrel and is expected to remain elevated through the end of the year. The U.S. Energy Information Administration (EIA) projects that Brent crude oil will average $93 a barrel in the fourth quarter.

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While the creeping oil prices raise concern about the outlook of cooling inflation — especially given its undeniable impact on last week’s economic data releases for August — the Fed is still on track to hold rates at this week’s policy meeting. The Fed’s interest rate policy outlook beyond September’s meeting remains uncertain, however. The market does not expect the Fed to be cutting rates any time soon. According to the CME FedWatch Tool, the market is predicting a long pause from the Fed.

Looking ahead

All eyes will be on the Fed’s key interest rate policy decision this Wednesday as well as updated economic projections from the Fed to get a read on the Fed’s presumed plan to pause rates and for how long.