Forget August CPI: US inflation is set to cool off just as voters go to the polls

It takes time for falling prices to feed into the consumer price index. Will that time be October?
Driving towards a discount.
Driving towards a discount.
Photo: Mike Blake (Reuters)
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US prices rose faster than expected in August, but other data make clear that inflation will start to cool in the fall, just as American voters are going to the polls for the midterm elections.

Prices rose by 0.1% last month, according to the Bureau of Labor Statistics (BLS), whereas economists had expected inflation to fall by 0.1%. Because the monthly rate of inflation is slower than most months that preceded it, the yearly inflation rate declined from 8.5% to 8.3%.

Economists had based their forecasts on declining prices for gas, used cars, and retail goods, which have shown up in other reports. The most likely explanation for the disconnect is simply that these price declines will show up in the core price index (CPI) over the coming months.

Gasoline prices declined by 10.6%, according to the new CPI report, and airline fares declined by 4.6% because of the decline in jet fuel. But other indicators were more surprising:

  • Used car prices declined only by 0.1% in CPI after a record-breaking drop as measured by the Manheim Index. This more than offset by a 0.8% increase in the price for new cars. The car market’s slowdown is likely to show up in future reports.
  • The price of housing accelerated in the August CPI report, even though it slowed down according to other measures of US rental prices. As the contraction in the housing market, induced by the Federal Reserve’s interest-rate hikes, makes house sellers turn towards renting, these prices will also stop rising at such a fast pace.
  • Apparel prices rose despite shipping rates declining and several major retailers saying that they are offering discounts to get rid of overstocked inventory.

“What you hear in earnings calls and transcripts will take some time to feed into the data as measured by the BLS,” said Skanda Amarnath, executive director at Employ America, a labor advocacy and research group.

The BLS view of the economy is likely to catch up to reality in the next few reports, which should show that US inflation is really starting to cool. The bureau’s next CPI report is due on Oct. 13, just three weeks before Americans vote on many of their senators and representatives in the midterm elections. While Republicans will harp on any rate of change above the 2% norm, a story of inflation going down—and so quickly—can only help the Democrats.