The Independent Market Observer

Is Inflation on Its Way Back Up?

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Aug 10, 2023 12:06:31 PM

and tagged Commentary

Leave a comment

InflationThis morning’s inflation data came in pretty much in line with expectations. Headline inflation was up 0.2 percent for the month and 3.2 percent for the year. Core inflation (excluding energy and food) was up 0.2 percent for the month and 4.7 percent for the year. So far, so good. At 0.2 percent per month, that would mean an annual inflation rate of between 2 percent and 3 percent. Pretty good, yes?

Too Early to Panic

You will see arguments today that no, it’s not good at all. The reason given will be that we saw headline inflation tick up from 3 percent to 3.2 percent on a year-to-year basis; therefore, inflation is on its way back up. Don’t believe it. First, the increase is due to base effects, in that inflation 12 months ago was lower. Pure math, not a spike. Second, the more important number, core inflation, continues to tick down. When you look at the solid monthly results and the continued improvement in the core numbers, it is way too early to panic.

But that doesn’t mean inflation can’t keep rising. So perhaps we should worry about that? Here, too, the news is better than it looks.

Shelter Inflation Matters

The current numbers are significantly influenced by high rates of shelter inflation. This is a lagging indicator, which doesn’t yet reflect declines in rental rates. Once we take shelter out, which was all of services inflation, the core number was actually –0.1 percent last month, and the annual rate was 2.5 percent. And when you look at the path of shelter inflation over the next several months, that should turn from a big positive factor to potentially even a negative one. This makes it reasonable to look at inflation excluding shelter as an indicator of where we are headed.

Positive Data Points

There are other encouraging data points as well. Core goods prices were down 0.3 percent last month. Used vehicle prices are expected to drop 6 percent to 7 percent over the next several months. Airline fares are down significantly for the second month in a row. In other words, while inflation is still too high—and the headline number ticked up on a yearly basis—the underlying trends remain very favorable and even potentially on track to get to the Fed’s target rates in the next year or so.

The Risks

The big risk in the short term is energy prices, which are moving up. But current pricing would still leave considerable room for lower inflation overall. Wage growth is another potential risk. But, again, at present levels, it is not a problem. There are other concerns as well, but again even in aggregate, they are modest compared to the positive trends.

Trends Remain Favorable

So, is inflation headed up on a sustained basis? Not likely, based on the data as of today. We did see a tick-up on the headline number, and you may well hear a lot about that. But the trends remain very favorable, and it is nothing to worry about.

Remain calm and carry on.

Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®