THE DAILY EDGE: 14 September 2023

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)

(…) “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.” (…)