Lower Gas Prices Collapsing Inflation At The Consumer Level

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Includes: CALM, JETS
by: Jenny Coombs

Summary

Gasoline prices caused the headline CPI to fall by 0.1% in August and the year-over-year rate up very slightly at a positive 0.2%.

For the core reading, which excludes the volatile changes in energy and food, inflation rose just 0.1% for the year and the year-over-year rate grew to 1.8%.

All three major energy commodities have shown massive declines year over year, with fuel oil down 34.6%, gasoline down 23.3% and natural gas down 11.5%.

While pricing levels had been showing some signs of strength in the first and second quarters, consumer prices came in quite soft for the month of August and will mean one more check for the doves at the Fed. According to the Bureau of Labor Statistics, gasoline prices caused the headline CPI to fall by 0.1% in August and the year-over-year rate up very slightly at a positive 0.2%. This merely implies that prices of everything, including gas, are just slightly above the same level as last year, and far away from the Fed's 2.0% inflation rate.

For the core reading, which excludes the volatile changes in energy and food, inflation rose just 0.1% for the year and the year-over-year rate grew to 1.8%. This is still under the Fed's 2.0% goal, however food and gasoline are the most commonly consumed products and inflation here is still quite dismal.

The chart below shows the monthly changes in the CPI index headline and core readings over the last year.

All details in the report were rather soft, but there were a few noteworthy observations among the various categories.

Food

Especially around harvest season, food prices typically fluctuate according to the size of the crop yields. However, in August overall food prices rose by 0.2% which is the same level as July. The prices of fruits and vegetables rose 1.5% in the month, for the largest gains of the year. Beef, poultry, and pork prices all declined while eggs increased by 7.7% and is now up over 35.3% over the last year. It has been a volatile name recently, but those numbers look pretty darn good for Cal-Maine Foods, Inc. (NASDAQ:CALM). Additionally, it is becoming more economically sensible to consumer food products in the home rather than dining out as the price for food-at-home has increase 0.8% year-over-year while the prices of dining-out increased 2.7% year-over-year. However, data from the retail sales report show that consumers are still enjoying excess savings from lower gas prices and are still dining out quite frequently.

Energy

After the massive pullback in oil prices in early August, it is not surprising to see overall energy prices drop by 2.0% for the month with a whopping 4.1% drop in gasoline prices - the non-seasonally adjusted number showed a decline of 5.4%. This is highly disappointing as the energy price index appeared to be getting better after rising in five of the past six months. Natural gas prices are back on the rise, increasing by 1.2% and virtually reversing the 1.4% decline back in July. All three major energy commodities have shown massive declines year over year, with fuel oil down 34.6%, gasoline down 23.3% and natural gas down 11.5% - yikes! Electricity prices have been all over the price, but rose slightly in August over the prior month but this is not too out of the ordinary since the summer weather has caused a major spike in usage.

Everything Else

For the most part, low oil prices trickled through the rest of the consumer space and ended up suppressing pricing pressures across the board. Airfares, for instance, dropped by 3.1% over the prior month after dropping by 5.6% in July - watch for volatility in the US Global Jets ETF (NYSEARCA:JETS) despite being close to 52-week highs as profit margins among airlines might get squeezed this quarter. Additionally, owners-equivalent rent rose only 0.2% for the month after having been on a tear recently. Back-to-school traction caused the prices of apparel to rise about 0.3% for the second month in a row; however this should cool down going into the next couple months. Lastly medical care costs, which should be on the rise due to increased demand, showed no change over the prior month.

Going into the Fed minutes on September 17, the 1.8% year-over-year increase in core inflation does really stand out and will be a major talking point for Fed officials. However, with foreign economies still weak and energy prices still dramatically low, the outlook for higher inflation is still very weak for the moment. This CPI report is not likely to warrant any action on the part of the Fed, but it goes to show just how volatile prices are in the United States across all sectors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.