Inflation Rose in August as Gasoline Prices Jumped Mild price pressures excluding energy keep Fed on track to pause rate increases next week

The consumer-price index, a closely watched inflation gauge, rose 0.6% in August from the prior month, the Labor Department reported Wednesday. More than half of the increase was due to higher gasoline prices.

So-called core prices, which exclude volatile food and energy items, rose by a relatively mild 0.3% last month after even lower readings in June and July. The August increase reflected higher costs for items such as airfares and vehicle insurance. (…)

On an annual basis, prices overall were up 3.7% in August versus 3.2% in July. Annual core inflation edged lower to 4.3% in August from 4.7% the prior month. (…)

The core CPI over the three months through August rose at a 2.4% annual rate, down from a 5% annual rate for the preceding three-month period. (…)

Food prices rose a mild 0.2% in August on a monthly basis, the same pace as in July. (…)

This Bloomberg chart illustrates the components of inflation. All trends are down on a YoY basis:

But the monthly dynamics show stickiness in the heavyweights: on a MoM basis, core CPI was almost double June and July growth rates although +3.6% annualized is encouraging.

CPI-Rent must be shaking the almost universal view that declining rentflation will surely drag core inflation down to the promised landing: its +0.51% rise in August beats its +0.46% average monthly gain since March. Last 6 months annualized: +5.6%; last 3 months: +5.6%; last 2 months: +5.5%; last month: +6.2%.

This 33% weight on the CPI is still up 7.8% YoY. To get to +3.0% by December, CPI-Rent needs to decline 1.3% sequentially from August or -0.31% per month.

Since 1950, that’s more than 870 months, CPI-Rent declined in only 8 months (7 of which right after the GFC) with an average monthly “drop” of -0.05%, the largest having been -0.14% in August 1992.

Lastly, core Services (black), closely correlated with wages, reaccelerated to +0.4% in August after +0.25% in June and +0.35% in July. Last 6 months annualized: +4.5%. Last 3 months: +4.1%.

Meanwhile, my “CPI-Essentials” measure was +5.2% YoY in August, a sharp increase from its June low of +4.1% as the renewed energy cost bite added to the rent squeeze. CPI-Food-at-Home rose only 0.2% in August, like in June, but that is still higher than the -0.1% monthly average between March and June.

In all, the Fed’s job is not done yet and consumers’ discretionary income keeps getting squeezed.

Retail sales are out this morning.

Fuel Prices Are Soaring: Who Is Feeling the Pinch? Production cuts made by OPEC and its allies have pushed crude oil to 10-month highs, pressuring construction companies, transportation businesses and farmers.

(…) A growing global thirst for fuel, fading fears of a U.S. recession and last week’s extension of Saudi and Russian cuts have propelled Brent crude above $90 a barrel. Higher gasoline prices accounted for more than half of August’s 0.6% increase in U.S. goods and services prices from July, according to Labor Department data released Wednesday. The prices of heavy fuels, which are more easily made from more-dense Russian and Middle Eastern crudes than U.S. shale oil, have risen even more than those of crude and gasoline.

Jet fuel has risen the most, its price soaring more than 50% on the Gulf Coast since early May. Chinese demand has ballooned as Beijing has relaxed pandemic-era travel restrictions, pushing its August jet fuel consumption back toward its prepandemic level from below 60% a year earlier, according to the analytics company Kayrros. (…)

Jet fuel prices might have further to run. Chinese international flight-fuel use is still 40% below its prepandemic level, according to Kayrros. Meanwhile, Asian refiners are still working to reverse Covid-era adjustments that reduced their jet fuel output, said Mukesh Sahdev, an analyst at the consulting firm Rystad Energy.

A tight jet fuel market is buoying diesel and marine fuel prices, said Sahdev, since all three fuels derive from the same fraction of the oil barrel. Making a gallon more of one means a gallon less of another. (…)

The price of diesel at the pump has risen 48 cents a gallon since July, according to AAA, compared with 9 cents a gallon for gasoline. (…)

Dwindling inventories could keep crude oil prices high in the coming months. The cuts by OPEC+ and growth in global consumption will cause demand to outstrip supply through the end of the year, according to Rystad, reversing a surplus in the first quarter. (…)

• Costlier Fuel, Labor Cut Into Corporate Profit

UAW, Automakers Remain ‘Far Apart’ in Contract Talks The union’s president said the United Auto Workers are preparing walkouts at select factories when contracts expire late Thursday.

Canada needs 3.45 million more homes by 2030 to cut housing costs as population grows, CMHC predicts

This is the second report from Canada Mortgage and Housing Corp. that quantifies the number of new homes the country needs to build to ensure that households are not spending more than 40 per cent of their disposable income on shelter. (…)

If the country continues to admit record levels of about 500,000 new permanent residents per year until the end of the decade, CMHC predicts an additional 4 million new housing units will be needed instead of 3.45 million. (…)

The typical home price across the country topped $700,000 as of July. And even though home prices have declined since the Bank of Canada started hiking interest rates in March 2022, values are still 40 per cent higher than 2019, prior to the start of the pandemic. As well, the nation’s apartment vacancy rate is just below 2 per cent and the average asking rental price for a one-bedroom unit is above $2,000 per month.

The housing agency uses the years 2003 and 2004 for its benchmark on affordability because it was a time when the economy was stable and housing costs were relatively low. During that period, the average household spent about 35 per cent of its disposable income on shelter. That has since increased to nearly 50 per cent nationally and nearly 60 per cent in Ontario and in B.C., according to CMHC’s previous report. (…)

The typical home price in the Toronto region was $1,161,200 in July, according to the latest data from the Canadian Real Estate Association. In the Vancouver region, it was $1,210,700 and in the Montreal area it was $520,000. (…)

For the country to get to 5.2-million new units by 2030, the rate of building would need to more than double from current levels. New home construction has already slowed due to the rise in material and labour costs.

Speaking of affordability:

Home builders tell us 32% of net sales this year have been to first-time buyers. How are first-timer affording new homes?

• 1) Price cuts
• 2) Rate buydowns
• 3) Smaller floorplans
• 4) Lower-cost finishes
• 5) Help from Mom+Dad
• 6) Moving farther from cities
• 7) Spending “excess” savings (@EricFinnigan)

Ray Dalio Says He Doesn’t Want to Hold Bonds, Cash ‘Is Good’

(…) “Temporarily right now, cash I think is good.”

When asked how to unwind the world’s huge borrowings, he said when debt becomes a big share of the economy, the situation “tends to compound and accelerate” as interest payments also grow. “We’re at that turning point of acceleration.”

While the size of the deficit is going to require the US to sell a lot of bonds to investors around the world, it’s difficult to keep interest rates at a level that’s attractive for creditors to hold, but not too high to harm the issuer, Dalio said. When investors choose to sell, pushing up yields, the central bank will need to decide whether to print money and buy bonds, which will drive up inflation pressures, he added.

“We’re seeing that dynamic happen now,” Dalio said. “I personally believe that the bonds, longer term, are not a good investment.” (…)

U.S. Flash PMI: US private sector at near-stagnation amid renewed fall in demand

The headline S&P Global Flash US PMI Composite Output Index indicated only a fractional increase in output across the private sector midway through the third quarter. At 50.4 in August, down from 52.0 in July, the latest reading signalled the weakest upturn in activity since February. Persistent challenges stimulating demand in the manufacturing sector were accompanied by slower growth in service sector output.

Following broadly unchanged levels of production in July, goods producers returned to contraction territory in August. The latest drop in output was the second in the last three months albeit only modest. Although still registering an expansion, services firms meanwhile reported the slowest increase in activity for six months as high interest rates and inflationary pressures were seen to have weighed on customer spending.

Softer demand conditions were evidenced by the first decrease in new orders at US firms since February. Manufacturers faced greater challenges driving demand as new orders fell at a quicker pace, while service providers saw the fastest drop in new business since the start of the year. Sustained pressure from inflation and high interest rates were often linked to the decline, with some firms also highlighting a greater need to invest in advertising to stimulate new sales.

Muted demand from key export markets, especially Europe, led to a renewed decrease in new export orders in August. The fall in foreign client demand extends the trend of contraction seen since June 2022 which was only broken briefly by a marginal expansion in July. The export drop was primarily driven by manufacturers, as service providers registered a slower expansion.

US firms were more upbeat in their outlook for output over the coming year in August. Although weaker than the series average, the degree of confidence picked up from July, with optimism buoyed by hopes of stabilization in interest rates, greater client demand and a moderation in price pressures. Businesses also mentioned plans to invest in marketing initiatives.

August data indicated only a fractional rise in employment. Although extending the current sequence of job creation that started just over three years ago, the pace of increase was the slowest over this period. Where growth in workforce numbers was noted, companies linked this to efforts to expand capacity. Nonetheless, weak demand and lower new orders resulted in job shedding at some firms, with mounting wage costs compounding decisions to cut staff.

Services providers reined in hiring activity as employment in the sector was broadly unchanged on the month. A lack of new business and some instances of difficulties retaining staff dragged on jobs growth. Meanwhile, manufacturers continued to see a rise in employment. The rate of job creation was the slowest since January, however, as voluntary leavers were often not replaced.

Strain on capacity dissipated further, as backlogs of work contracted at the sharpest rate since May 2020. Decreases in incomplete work at both manufacturers and service providers quickened from July.

Prices

Upward pressure on operating expenses from greater wage bills, increased raw material prices and higher fuel costs led to a reacceleration in the pace of input price inflation in August. The rate of increase in costs was sharper than the long-run series average, as manufacturers and service providers recorded faster upticks. Although much slower than those seen through the last two years, the pace of increase in cost burdens at goods producers was the steepest since April.

In contrast, the rate of output charge inflation slowed during August amid efforts to boost sales. The pace of increase was historically elevated as firms continued to pass through higher costs to clients, but reports of customer requests for discounts and competitive pricing stymied upticks in selling prices. The overall increase was led by service providers, however, as manufacturers left output charges unchanged from July.

Manufacturing PMI

At 47.0, down from 49.0 in July, the S&P Global Flash US Manufacturing PMI signalled a solid deterioration in operating conditions midway through the third quarter. The decline was the second-sharpest since January, as a renewed drop in output and steeper decrease in new orders weighed on the overall performance of the sector.

Lower new sales led to retrenchment among manufacturers as input buying fell at a quicker pace. The marked drop in purchasing activity reflected a reduced need to store materials and finished items. Subsequently, manufacturing inventories declined further. Despite lower demand, vendor performance improved to the smallest extent since February. Some companies stated that a shortage of drivers at suppliers frustrated efforts to reduce delivery times.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“A near-stalling of business activity in August raises doubts over the strength of US economic growth in the third quarter. The survey shows that the service sector-led acceleration of growth in the second quarter has faded, accompanied by a further fall in factory output.

“Companies report that demand is looking increasingly lethargic in the face of high prices and rising interest rates. A resultant fall in new orders received by firms in August could tip output into contraction in September as firms adjust operating capacity in line with the deteriorating demand environment. Hiring could likewise soon turn into job shedding in the coming months after a near-stagnation of employment in August.

“Rising wage pressures as well as increased energy prices have meanwhile pushed input cost inflation higher, which will raise concerns over the stickiness of consumer price inflation in the months ahead. One upside is that weak demand is starting to limit pricing power, which should help keep a lid on inflation around the 3% mark.”

Coming after the strong July retail sales report, the flash PMI suggests that the economy is not re-accelerating, quite the opposite actually. The goods inventory cycle remains in overhang while demand for services is fading.

Meanwhile, rising oil prices are adding to cost pressures, threatening margins.

How High a Rate Can Housing Take? Home builders are thriving despite the highest mortgage rates in a generation, but existing homeowners might have less to celebrate if high rates persist.

(…) On Wednesday the Commerce Department reported that a seasonally adjusted 714,000 new homes were sold in July, at an annual rate, which compared with 684,000 in June and 543,000 in July last year. This was still well below the 1.03 million clocked in August 2020, when home buying was surging, but a faster pace than the prepandemic year of 2019, when 683,000 new homes were sold. (…)

Toll Brothers on Wednesday, discussing results for its fiscal quarter ended July 31, said that the seasonal falloff in demand that it typically sees in August from July, as the summer home selling season winds down, has so far been much smaller than it typically experiences.

“The supply-demand imbalance created by a lower resale inventory compounds the impact of the persistent underbuilding of homes over the past 15 years,” said Toll Chief Executive Douglas Yearley. “Even before resale inventory dropped, there was a structural shortage of anywhere between three and six million homes in this country.” (…)

Data: FactSet; Chart: Axios Visuals

U.S. Corporate Bankruptcies On the Rise

(…) This graphic shows the surge in corporate bankruptcies in 2023 based on data from S&P Global.

So far in 2023, over 400 corporations have gone under. Corporate bankruptcies are rising at the fastest pace since 2010 (barring the pandemic), and are double the level seen this time last year.

Firms in the consumer discretionary and industrial sectors have seen the most bankruptcies, based on available data. Historically, both sectors carry significant debt on their balance sheets compared to other sectors, putting them at higher risk in a rising rate environment.

Overall, U.S. corporate interest costs have increased 22% annually compared to the first quarter of 2021. These additional costs, combined with higher wages, energy, and materials, among others, mean that companies may be under greater pressure to cut costs, restructure their debt, or in the worst case, fold.

Canadian retail sales, up modest 0.1% in June, signal sluggishness in consumer spending

Retail sales, which indicate how much consumers are spending on goods, rose by a modest 0.1 per cent month-over-month in June, just slightly better than economists’ expectation of no increase. In volume terms, retail sales actually declined 0.2 per cent.

That was the second consecutive month of slower growth, after May retail sales were little changed, up just 0.2 per cent, after strong gains in April.

Consumer spending was surprisingly strong in the first quarter of 2023 and into the spring, shocking central bankers and economists alike for its resilience in the face of higher borrowing costs. Now, however, consumers are showing signs of retreating – with a notable pullback in goods spending in recent months. Spending on services remains relatively strong. (…)

The small increase in June was led mainly by auto purchases, as sales from motor vehicle and parts dealers edged 2.5 per cent higher, while sales at new-car dealers rose 2.9 per cent.

Excluding gas stations, fuel vendors and motor vehicle dealers, retail sales dropped 0.9 per cent month-to-month. Sectors such as general merchandise and food and beverage retailers saw the largest declines. Receipts at supermarkets and other grocery retailers also showed signs of slowing after six months of monthly increases. (…)

Statistics Canada’s advance indicator suggests retail sales in July ticked up slightly, by 0.4 per cent, but that number is still subject to revisions. (…)

Turkey raises interest rates by 7.5 percentage points