September 12, 2023

The CPI jumped 0.6% in August after climbing 0.2% in July  The year-over-year increase is currently 3.7%.  We expect the CPI to increase  4.0% in 2023, and 3.0% in 2024.  While the markets are convinced that inflation will now improve rapidly, that is unlikely to happen.

Food prices increased 0.2% in both July and August.    In the past year food prices have risen 4.2%.  Economists typically subtract food and energy prices from the CPI and focus on the so-called “core” rate of inflation.  That is because these two categories are extremely volatile.  They might go up for a few months but then reverse direction and decline almost as quickly as they rose.  Currently, food prices have slowed from their torrid pace a year ago.  But it is important to remember that Ukraine is a big exporter of wheat and corn.  There will be few exports of corn and wheat coming from Ukraine any time soon.   Food prices are likely to remain elevated.

Energy prices jumped 5.6% in August after having risen 0.1% in July.  In the past year they have fallen 3.7%.  After a big jump to $120 per barrel last  year as the war began, crude prices have fallen considerably.  The decline was caused by the steady flow of additional oil from the Strategic Petroleum Reserve.  Tapping of the SPR has now largely ceased and it has fallen 50% from what it was at the beginning of last year and is now at (in our opinion) a dangerously low level.  It is hard to see how oil prices can fall much further.  Meanwhile, crude oil inventories are the lowest they have been since 2000.  Finally, the current administration is putting a severe crimp on oil producers by shutting down pipelines and doing its best to drive the entire fossil fuel industry out of business.  Biden wants to drive domestic producers out of business.  Keep in mind that higher energy prices seep into the prices of a whole array of other goods as the cost of jet fuel and diesel prices impact airfares and shipping costs for virtually everything.

The core CPI rose 0.3% in August after gaining 0.2% in July.  The  year-over-year increase now stands at 4.4% after having risen 5.7% in 2022.  The core CPI is decelerating but further progress from here on will be slow.

At the moment, goods sector inflation is rising slowly as consumers have been spending less money on goods but more on services. Core goods sector inflation has risen 0.4% in the past year as supply constraints have disappeared.  However, inflation in the core service sector (which is twice the size of the goods sector) has been steadily rising and has climbed 5.9% in the past year.  This is important because services make up two-thirds of the entire CPI.

Amongst the goods categories, used car prices declined 1.2% in August after falling 1.3% in July.  Used car prices have fallen 6.6% in the past year.

New car prices rose 0.2% in August after having declined 0.1% in July.  For the year as a whole new car prices have risen 2.4%.

Prices in the service sector are being driven by housing.  Home prices have risen every month since January

If  home prices begin to rise anew, the shelter component may not slow nearly as much as the Fed seems to expect.   The shelter component of the CPI rose 0.3% in August after climbing 0.4% in  both June and July  This means the year-over-year increase now stands at 7.2%. This is a big deal because rents represent one-third of the entire CPI index.  We are now expecting a 5.5% increase in the shelter component in 2023.  A 5.5% increase in one-third of the entire CPI index is not at all consistent with an overall inflation rate of 2.0%.

Also in the service sector, airfares rebounded by 4.9% in August after having plunged by 8.1% in both June and July..  They have been falling since June of last year and the decline undoubtedly reflects the lower cost of jet fuel.  In the past year airfares have declined 13.3%.  But, as noted earlier, crude prices have risen sharply in the past month or two and those price hikes have not yet completely filtered their way into the CPI.


Hotel room rates declined 3.6% in August after falling 0.5% in July.  Room rates have risen  3.0% in the past year.

There is no doubt in our mind that the inflation rate will continue to rise because of dramatic growth in the money supply in 2020 and 2021.  Typically, M-2 rises at about a 6.0% pace.  But when the Fed purchased $3.0 trillion of government securities back in the spring of 2020, money growth soared.  It continued to grow rapidly right up through March of last year.  Currently, the level of M-2 stands $1.6 trillion higher than its desired 6.0% growth path.  That means that the economy currently has $1.6 trillion more liquidity than it needs.  If the Fed continues to shrink its portfolio for the rest of this year, the excess liquidity may be nearly eliminated by the end of 2023.

The core CPI rose 5.7% last year.  We expect it to increase 4.0% in 2023, and 3.0% in 2024.  It will take another two years for the core CPI to come close to the Fed’s 2.0% inflation target.

Stephen Slifer


Charleston, SC