Will Inflation Continue? If so, for How Long?

The Consumer Price Index (CPI) for September was released today (October 13th, 2022) and the year-over-year total decreased from 8.3% to 8.2%. This will be the last report before the midterm election which will take place on November 8th, 2022.The annual CPI number reported each month is a combined string of 12 months of data, think of it as being 12 dominoes, a new one comes on, and the oldest one drops off.  THESE are the 2 dominoes to look at to see if things got better or worse. In Sept ‘22 the month came in at 0.4% and it replaced Sept ‘21 which was also low at 0.4%.  One low number replaced another low number, and as such not much change occurred.

The tall blue bars don’t drop off until Oct ’21 data drops off when Oct ’22 is reported on November 10th.

Inflation By Month

Given how September’s job growth announced on Oct 10 was robust and inflation remains above desired levels, the Federal Reserve will likely continue with its announced future rate increases into the foreseeable future. Fed’s next meeting is Nov 2. The only issue is whether it will be a 50-bps or a 75-bps increase.

Energy prices have been THE major driver of inflation in 2022. Oct ’21’s 3.7% will drop off next month and it should help reduce overall inflation.

Inflation – Energy Prices Driving Costs

The 12-month Consumer Price Index (CPI) decreased from 8.3% to 8.2% for September 2022. Energy prices decreased in September but for the year are up 20% and that is worldwide. Exclude energy, food, and Used Cars and inflation was 6.2%. The Federal Reserve sets interest rates based on the PCE which is 6.0%.

Inflation: 12-Month Period Ending: SEPTEMBER 2022

INFLATION’s major causes are higher Energy and to a lesser extent Food. As a bar gets closer to the LEFT, it will fall off as new monthly data becomes available. The black hatched bar is the month that has recently fallen off and has been replaced by the most recent month’s data, that being Sept 2022. Higher interest rates will NOT solve these isolated sources of inflation.

GAS PRICES are an international item that affects all. President Putin of Russia invaded Ukraine on February 24th, 2022, and gas prices went up 19% in ONE month alone. The March 2022 spike will continue to be included in the annual CPI calculation for the next 7 months. For June, gas prices are up 17% over May. Gas prices for the month of August were down 7% due to the Biden Administration’s release of petroleum from the Strategic Petroleum Reserve.

US Department of Energy: Average Gas Prices

Sept 2021 data (red) was replaced by Sept 2022 (green). When red is larger than green, then inflation for that item will improve. When green is larger, then inflation is WORSE.

NEXT month will have new data for Oct 2022, therefore Oct 2021 data will drop off. Oct 2021 is the RED bars. The green bar is the average of the prior 6 months (Apr ‘22-Sept ‘22). When green is larger, then inflation is worse. Next month will NOT have good news for the Core component.

The red bars are the MONTHLY average of Oct ‘21-Mar ‘22 while the green bars are the average of Apr ‘22- Sept ‘22. When green is larger, then inflation is worse. A monthly 0.4% is about a 5.0% annual rate.

As we move forward in 2022, and as the impacts of COVID-19 subside, the economy will come into focus. Below are the publication dates of the CPI, PPI, and Net New Jobs. These items will be key factors during the Federal Reserve’s meetings which are also listed below.

Bill Knudson, Research Analyst Landco ARESC