Let’s start with a headline and a vibe. The all-important August inflation report was just released, and inflation remains a serious problem. And there’s a little bit less reason today to feel optimistic that it’s going away anytime soon.
Inflation day is an important day for my profession. The folks inside the Federal Reserve, plus those of us in academia, we’re waiting eagerly for these numbers to come out. This is economics Super Bowl Sunday. But, unlike the Super Bowl, it comes twelve times a year.
Inflation is up, but you knew that already
There’s a lot of data to dig into here. If you want the big picture, start with what’s called the headline inflation rate.
The average price level across the whole economy — the Consumer Price Index, which measures the cost of living — rose by 3.4% over the past year. That’s pretty much what everyone was expecting, but bad news you were expecting is still bad news. The Fed wants that number down around 2%. So we’re in uncomfortable territory here.
Also: we’ve pretty much flatlined. Inflation is no longer falling. Actually, this month, prices grew by 0.4%. That’s pretty hefty.
Now, there’s a lot of data here, and different people can use it to make all kinds of political points. So please: don’t let partisans from the left or the right pick a single number — the price of eggs, or cherries — and pretend that is your cost of living. Headline inflation is the best way to measure that, and the rest is cherry-picking.
But wait: there’s more (inflation)
This year, the folks growing U.S. winter wheat reported that they were facing severe drought conditions. Producers in Kansas logged some of their worst crops in history. On the other side, farmers are projecting a record-breaking harvest for soybeans. Crops are vulnerable to these changes — and those changes affect prices. This can also happen very, very fast (think avian flu).
Food prices move with the weather. Energy prices move with the Strait of Hormuz opening and closing and closing further. Neither of those tells you much about the broad domestic forces that will drive the wide set of prices underlying our economy. So if what you’re trying to do is predict where inflation goes next, you usually get a clearer picture if you watch core inflation. That’s defined as the cost of living with food and energy stripped out.
And now you’re going to say: mate, food and energy are really important expenses. Don’t subtract those.
I hear you. I agree with you. But this is a question about forecasting, not about your grocery bill. If you want to know what happened to your cost of living, use the headline. If you want to know where inflation is heading, use core. Both measures are useful, but for different purposes.
So: core inflation ran at 2.4% over the past year, and 0.3% over the past month. That latter number is really the one that moves Wall Street — it’s the bit they didn’t already know. And this month came in a touch above what they’d penciled in.
Which gives us today’s verdict. Lightly disappointing. It’s a small miss, and it isn’t showing up in everything. But still, inflation stayed stubbornly higher than we’d hoped.
What that does to your paycheck
Rising prices only bite if your wages don’t keep up. Right now they aren’t. Real wages — average hourly earnings, adjusted for inflation — are down 0.3% over the past year, and they’ve been negative since the spring. The average American can buy a little less today than a year ago. That might explain some of the grumpiness.
That average also hides two very different people. If you stayed in your job all year, you found out what a lot of people find out: bosses are stingy and they give small raises. If you switched jobs, you probably did better, because the market rewards those who hunt around and find the market rate. So if you’re looking at -0.3% and thinking, my budget shows a bigger hit than that — you’re probably right.
More info is just around the corner (and it’s not looking good)
Today’s report was for August, and we’re already in the second week of September. The question is: where’s the economy going? And our best answer there comes from energy markets. I’m sorry to say this again, but it’s not looking great.
We are beyond six months into the planned four-to-six-week war with Iran. The Strait of Hormuz is closed or barely open, with a trickle getting through. Oil is up more than 15% this month alone. West Texas Intermediate was briefly above $100 yesterday and sits at $99 today.
Before the war, futures markets expected oil to sit around $60 a barrel and stay there more or less forever. You can think of the gap — about $39 a barrel — as the price tag on this war. It has pushed the price of oil up by more than half.
Futures markets now see oil above $80 a barrel at least through early-to-mid 2027. For you, that’s gas at $3.50 or more for months, and $4 and up for plenty of people already. And it doesn’t take long for the Middle East to reach your local pump. You might see it this afternoon.
Back to the folks running around the building
Today’s number was slightly too hot, and the Fed was already on edge. And Wall Street noticed. As of last night, fed funds futures put a 72% chance on a hike at next week’s meeting. This morning’s data took that to 86%.
Put it on the political calendar and it gets louder, because there are two Fed meetings before election day. Markets now price a 90% chance of at least one hike before Americans vote — 58% for one, 31% for two.
Which is why I’m pouring one out for poor Silent Kevin. Last week the president posted that he’d raise tariffs on other countries if Kevin Warsh raised rates. If that sounds bizarre to you, it isn’t your economics failing you: one arm of the U.S. government threatened another arm of the U.S. government with a tax on a third party. Markets have now told us what they make of it. They’ve priced it at approximately nothing.
And finally, the burrito
The burrito price index was also updated this morning. It’s not an official Bureau of Labor Statistics release — it comes from Toast, which runs the software in a great many restaurants. The average burrito rose two cents, to $13.69. So the $20 burritos everyone complains about still don’t actually exist.
I’d argue it’s a serious indicator, mind you — or at least an easy number to swallow. A burrito is a consumption basket with a tortilla around it — meat, rice, beans, sour cream, guac, lots of green salsa. And that basket keeps getting dearer.
Meanwhile, iceberg lettuce is down to $1.47 a pound and plummeting, and we all know why nobody’s buying iceberg lettuce right now. If that’s the plan for bringing inflation down, I’ll take the inflation.
And this is where I get to say, in my full dad joke glory, that the cost of living romaines a problem.
What continues to be left out are the effects on older folks on fixed (non-inflation-adjusted) income and the $6.00 a gallon price of diesel fuel, which affects the transport cost of all our food and goods, which I see as highly inflationary to come.
Justin — the central tendency CPI measures edged lower with the median CPI down to 2.1 percent over the 12 months ending in August. What do you think of those inflation measures?