The Acceleration of Inflation in the Second Half Has Begun, “Disinflation” Honeymoon Terminated

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Month-to-month CPI spikes, core CPI and core services CPI accelerate, despite ongoing massive health insurance adjustments.


The Consumer Price Index (CPI) jumped by 0.63% in August from July, the biggest month-to-month increase since June 2022. Annualized, this amounts to a red-hot 7.8%.

This jump comes despite the still ongoing ridiculous monthly adjustment to the health insurance CPI that caused it to collapse by 33.6% year-over-year. The September CPI, to be released in October, will be the last month with that adjustment; with the October CPI, to be released in November, it will flip, which will add upward momentum to the CPI readings. CPI, core CPI, and core services CPI have been understated significantly since October last year, when the monthly health insurance adjustment started, one of the biggest data distortions coming out of the pandemic (more in a moment).

With this month-to-month spike, the year-over-year CPI rate accelerated to 3.7%, the second year-over-year acceleration since June 2022, according to the Bureau of Labor Statistics today (green in the chart below). July had already marked the end of the period of “disinflation” when the year-over-year inflation rate accelerated for the first time since June 2022.

The “Core” CPI, which attempts to track underlying inflation by excluding the volatile food and energy products, rose by a still-hot 4.3% in August, compared to a year ago (red in the chart).

Given the narrower focus of core CPI, and the therefore proportionally bigger weight of health insurance in it, core CPI was even more distorted than overall CPI by the 33.6% collapse of the health insurance CPI.

Core CPI, month-to-month, was held down by the collapse of the health insurance CPI, and yet, it still accelerated to 0.28% in August from July.

Fuel prices will push CPI up further, even core CPI.

Starting with April, the year-over-year plunge in energy prices at the time, particularly gasoline, pushed the overall CPI increases below those of core CPI.

But on a month-to-month basis, gasoline prices have been surging all year – they jumped 10.6% in August from July – thereby whittling away at the year-over-year plunge as we went. In August, gasoline CPI was still down by 3.3% from August 2022.

Given how the gasoline CPI plunged in late 2022, we know that on a year-over-year basis, gasoline CPI will turn sharply positive later this year. The green line in the chart connects August 2023 and August 2022:

Gasoline accounts for about half of the total energy CPI. Note that gasoline, and energy overall, are still negative year-over-year, despite the sharp month-to-month increases. They will flip to positive, and become bigger drivers of CPI inflation over the coming months:

CPI for Energy, by Category MoM YoY
Overall Energy CPI 5.6% -3.6%
Gasoline 10.6% -3.3%
Utility natural gas to home 0.1% -16.5%
Electricity service 0.2% 2.1%
Heating oil, propane, kerosene, firewood -12.4% 8.4%

How fuel prices filter into “core” CPI.

Diesel has also been surging this year on a month-to-month basis. The price of diesel over time filters into the prices of consumer products that are shipped by truck and rail, as are nearly all consumer products. Jet fuel has been surging similarly, and that filters into products that are shipped by air, and into services via air fares. These products and services are reflected in core CPI, which is how core CPI reacts indirectly to rising energy costs.

The tougher second half has started.

We’ve been warning here about this for months while the media was touting the story that inflation was “vanquished” or whatever. We knew CPI would worsen dramatically in the second half for at least three reasons:

  • Energy prices won’t plunge forever, and in fact, gasoline prices began surging again.
  • The “base effect,” which pushed down year-over-year CPI in the first half, is finished.
  • The ridiculous “health insurance adjustment” that started with October 2022, will swing the other way, starting with the October CPI, to be released in November. More in a moment.

The collapse of the health insurance CPI.

The monthly adjustments to the health insurance CPI, which started with the October CPI last year, will swing the other way with the October CPI this year, to be released in November (I discussed the details a month ago here).

The adjustment pushed down the health insurance CPI every month on a month-to-month basis by 3.4%-4.3%, which has now caused the year-to-year health insurance CPI to collapse by 33.6%, despite maddening price increases of health insurance in the real world. I’ve called these monthly adjustments “odious” and “ridiculous” because that’s what they are. They’re one of the worst data distortions that came out of the pandemic…..


Continue reading this article at Wolf Street.



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