Key Points
- Core CPI ticked lower to an annual rate of 2.4% in August, while headline CPI edged up to 3.4%.
- However, rising producer prices warn of strong margin pressure that corporations will likely pass on to consumers through price hikes.
- Energy prices are driving higher inflation, with diesel rising to a record $6 per gallon.
- Houthi attacks on Saudi Arabia’s East-West Pipeline are expected to drive crude oil prices higher next week.
- 10-year Treasury yields are testing resistance at 5.0%, while Gold softened to $4,350 per ounce.
Headline CPI edged up to an annual rate of 3.4% in August, while core CPI ticked lower to 2.4%.
For the month of August, headline CPI increased 0.40%, in line with expectations, while core CPI’s increase of 0.29% was higher than the expected 0.20%.
CPI remains above the Fed’s target inflation rate of 2.0% but gives little warning of the expected inflation shock ahead.
Producer prices have risen 5.4% over the 12 months to August, warning of strong margin pressure that corporations will likely pass on to consumers through price hikes.
Finished goods PPI reacts faster to higher energy prices, reaching an annual rate of 6.6% in August. While slower to react, Services PPI is also rising at 4.5%.
Strong producer price rises are reflected in the ISM Non-Manufacturing (Services) survey. The Prices index climbed to 72.6%, the highest reading since July 2022, and the 21st consecutive month above 60%.
Services Prices tend to lead US CPI inflation by 2 to 6 months, as shown in the longer-term chart below. The current divergence between ISM Non-Manufacturing Prices (blue) and CPI (red) warns of a sharp rise in CPI ahead.
Energy prices are the primary driver of the current CPI spike, as in 2022 when energy prices soared 40% after Russia’s full-scale invasion of Ukraine, followed by a rise in CPI to 9.0%.
Average US gasoline prices rose to $4.16 per gallon in September as crude prices climbed.
However, distillates are taking the brunt, with average diesel prices rising to a record high of $6.00 per gallon.
NEW YORK, Sept 10 (Reuters) – The U.S. national average price of diesel on Thursday surpassed $6 a gallon for the first time ever, according to price tracker GasBuddy, as the U.S.-Israeli war on Iran and Ukrainian attacks on Russia’s refineries have squeezed supply….
“Every truck, every delivery, every package, every grocery run just got more expensive,” GasBuddy analyst Patrick De Haan said on social media site X.
“Record diesel prices will impact every cargo, shipment, every delivery Americans are taking, and are likely to reignite inflation up and down the supply chain,” he said.
“In a span of five months, we’ve seen diesel prices more than double. It has rocked our cash flows,” said Alex Ryan, energy director at Kansas-based fuel supplier Oasis Energy. “There’s gotta be a tipping point, I just don’t know when or where it’s going to be,” he said….
U.S. diesel inventories stand 13% below their five-year average, the Energy Information Administration said, at 106.3 million barrels. Stocks rose last week as refiners ran plants at full tilt to capture strong margins.
The U.S. diesel crack spread , a measure of refining margins, surged to a record high of $112.17 a barrel on Thursday, LSEG data showed.
U.S. distillate inventories are near multi-decade lows for this time of year, even with refiners operating at high utilization rates, said Linda Giesecke, director of refined products at Rapidan Energy. It will likely be difficult to rebuild stockpiles over the next two months as seasonal refinery maintenance gets underway.
Brent crude futures rose to $107 per barrel last week, before retracing late Friday to $104.60, testing new support at $100 per barrel.
Talk of new peace talks is meaningless, but the Trump administration is still able to manipulate oil futures by spamming the media. Iran is likely to increase its attacks on oil transit routes in the Middle East ahead of the November midterms. From Reuters:
“Some headlines of possible new talks in the Middle East are weighing moderately on oil prices today,” said UBS energy analyst Giovanni Staunovo. “I keep seeing near-term risks to the upside for oil prices, but we should expect ongoing high price volatility too.”
In a further development for Riyadh, satellite imagery showed smoke on Thursday in the vicinity of Saudi Arabia’s East-West Pipeline, vital for the kingdom to divert its crude exports away from Hormuz.
As more reporting said a pumping station on the pipeline had been damaged by Iran-affiliated militants, prices stayed lower.
“It’s surprising the oil market remains down in light of reporting that Houthi rebels attacked the East-West Pipeline, which would impact 7 million barrels of crude,” said Andrew Lipow, president of Lipow Oil Associates.
“Repairing a pumping station would require a lot more than repairing a break in the pipeline,” Lipow said.
Stocks, Treasuries & Gold
The S&P 500 continues to test short-term support at 7600. A breach would signal a secondary correction to test support at 7000.
The bond market is voting with its feet. 10-year Treasury yields are testing resistance at 5.0% ahead of next week’s FOMC meeting. Many pundits are projecting a rate hike on September 16 because of inflationary pressure. Still, the new Fed Chair Kevin Warsh would have to be really dumb to risk offending President Trump with a rate hike ahead of the midterms.
We expect the Fed to hold off on another rate hike at least until December, but that is likely to cause a strong backlash from the bond market, with the 10-year rising strongly above 5.0%.
We expect Gold to soften as the war in the Persian Gulf continues, testing support at $4,000 per ounce, but remain long-term bullish on its prospects.
Conclusion
We expect rising energy prices to drive higher inflation over the next six months.
Rising long-term Treasury yields will likely be bearish for stocks.
Gold is expected to soften for another test of support at $4,000 per ounce as the war in the Middle East and crude oil shortages intensify. However, we remain long-term bullish on Gold due to rising fiscal deficits by G7 economies, coupled with strong Gold buying by central banks and private investors, especially in China, as the fiscal outlook deteriorates.
Acknowledgments
- CoinDesk: Bitcoin
- Federal Reserve of St. Louis: FRED Data
- CNBC: Brent Crude ICE May’26 Futures
- EIA: Gasoline & Diesel Prices
- Institute for Supply Management: ISM Report on Business
- Trading Economics: ISM Non-Manufacturing Prices Index
- Reuters: US average diesel price passes $6 a gallon for the first time
- Reuters: Oil falls but heads for 8% weekly gain on tight supply
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.