Zacks Investment Management

In today’s Steady Investor, we dive into key factors that we believe could impact the future of the market such as:

• Inflation ticks higher in August
• An important shift in the Fed officials’ rate stance
• The effects of higher fuel costs

Inflation Ticks Higher in August, Driven Mostly by Gas Prices – The Labor Department released the latest consumer price index (inflation) data on Wednesday. Prices moved in the wrong direction. The report showed CPI increasing by 0.6% in August from the previous month, with the annual increase registering at 3.7%. In July, the annual inflation print was 3.2%. The culprit in August was gas prices, which have been rising as crude oil prices rise globally. The announcement by Saudi Arabia and OPEC+ that production cuts scheduled to end in September would be extended to the end of the year sent crude oil prices higher, with the global price of a barrel rising above $90. Food and energy prices have historically been very volatile components of the consumer price index and other inflation gauges, which is why the Federal Reserve generally focuses on underlying inflation forces, found in the ‘core’ measure. Core CPI strips out food and energy, and that metric was up 0.3% in August from July and 4.3% year-over-year, a solid improvement from July’s 4.7% print. Importantly, when core CPI is looked at over a 3-month period, it increased at an annual rate of 2.4%, which is a substantial improvement from the 5% annual rate recorded over the previous 3-month stretch. The Labor Department reported that half of August’s increase was because of gas prices, which arguably keeps the Fed from becoming too worried and sets up a ‘pause’ of rate increases at the next meeting.¹

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Core inflation continued in a downtrend, while gas prices pushed overall CPI higher

The Fed’s Shifting Stance – While some headlines may suggest that inflation got worse in August, the Federal Reserve likely won’t be overly concerned about the overall CPI figure. For one, Core CPI continued to trend lower, as we mentioned previously. But there has also been a notable shift in thinking among Fed officials and policymakers over the past year. This time last year, Fed officials seemed convinced that the U.S. economy needed to enter a recession – with a meaningful bump in unemployment – in order to bring price pressures down. But that outlook has changed. Now many policymakers worry that overtightening by raising rates too much could lead to an unnecessary downturn, or perhaps result in more problems in the banking sector. Many have pointed to the fact that monetary policy is already tight, with the fed funds rate higher than the current inflation rate, and that more time is needed to gauge the full effect of higher rates on the economy.⁴

How Higher Fuel Costs are Impacting Business – Within the Labor Department’s inflation report, it was noted that energy prices charged by suppliers for gasoline were up 20%, jet fuel was up 24%, and diesel fuel was up 41%. These heavy fuels are more easily made from denser Russia and Middle Eastern crude oil, versus U.S. shale oil. And since Russia and the Middle East recently announced an extension of production cuts, price pressures have been mounting. But another key factor driving prices higher, particularly for jet fuels, has been the resurgence of travel in China with the end of zero-Covid and associated travel restrictions. Reports show that China’s jet fuel consumption is rising back to pre-pandemic levels. Interestingly, jet fuel, marine fuel, and diesel all derive from the same fraction of a barrel of oil, such that making a gallon more of jet fuel means making a gallon less of the others. That’s putting pressure on all three categories, which is affecting costs and margins across the airline, trucking, and other fuel intensive businesses.⁵

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