The CPI Print: An Oil Story
Headline inflation firmed up, matching the forecast, and it was mostly an oil story. Gasoline made up about a third of the monthly price increase. July was the exception: when oil and energy prices fell that month, CPI dipped, and core inflation eased to about 2.4%. This month oil is back above $100 a barrel, so gasoline prices rose again.
Diesel matters as much. Yesterday's PPI showed a 24% jump in diesel, a massive move. Diesel feeds into transportation prices, and transportation prices feed into the cost of everything that shows up at your door - transport, food, and core goods.
There is a theory that consumers can pull inflation down by refusing to pay high prices, saying "I'm not going to pay for that." But people still have to buy certain things, so that limits how much they can push back.
A Weak, Narrow Labor Market
Conditions are hard for consumers now. Hiring rates are the lowest in over a decade. People are not moving into new jobs, and quits are low, meaning very low churn because there are few job openings. Getting rehired is tough; you might have to sit out for a while.
The share of the labor force unemployed for 27 weeks or longer - long-term unemployed - is about 1.14%, roughly 280,000 workers. That is nearly double what it would be in a healthy labor market expansion.
Wage growth is still slipping. Wages adjusted for inflation keep falling. So the consumer faces higher prices and higher interest rates at the same time.
The Fed Should Hold
The Fed should hold rates next week, not hike, and see what happens. Bond yields are rising, so the Fed is already getting some of the tightening it wants.
The main argument against hiking: the inflation risk is up, but it is mostly supply driven. Hiking into a supply shock is like a tax on the consumer. It is the wrong recipe and would hurt the consumer even more. The labor market is very narrow and not healthy, so it makes sense to hold and watch the inflation side.
The Cost of Everything Is Up
Interest rates are higher across credit cards and mortgages. Mortgage rates above 7% are freezing the housing market: supply has increased, but houses are not selling because of affordability.
Credit card delinquency rates for borrowers under 30 are roughly 10%, a 59% increase since 2022. Many younger households and recent graduates cannot get into the labor force, so household formation will stay low given the current economy.
A Two-Speed Economy
Parts of the economy are doing great, so this is not doom and gloom. Inflation is down from where it was, and the labor market is generally decent even if narrow.
This is a two-speed economy. Strength is concentrated in the AI buildout, which made up roughly 80% of the increase in Q2 GDP. The construction sector is still doing well on data center building. The San Francisco Fed's measure of PCE inflation finds only about 40% of inflation is demand driven, and most of that demand is concentrated in AI. Healthcare is also strong, since spending keeps rising as Americans age.
At the same time, some people are using buy now, pay later for the things they need most. This is a consumer on the brink, and a rate hike is the wrong remedy.
