Fed’s Nightmare, but it’ll cut anyway: CPI, Core CPI, and Core Services CPI all over 4% annualized. Goods prices spiked for Used Vehicles, Food, Gasoline.
By Wolf Richter for WOLF STREET.
Core services, which dominate the inflation index and include many of the essentials that consumers cannot do without – housing, healthcare, insurance, etc. – rose by 4.3% annualized in August from July, the second month in a row over 4%. In goods, the biggie was the spike in used-vehicle prices, continuing a year-long trend. Food and gasoline prices jumped.
“Core” CPI, which excludes food and energy components to track underlying inflation, accelerated to +0.35% in August from July (+4.2% annualized), the worst since January, and beyond January, the worst since March 2024 (blue in the chart below).
Year-over-year, “core” CPI accelerated to +3.1% annualized, the worst since February, and the fourth acceleration in a row (red):
The overall CPI, which includes food and energy, rose by 0.38% (+4.7% annualized) in August from July, the worst since January, and beyond January the worst since February 2024 (blue in the chart below).
Food and energy prices both increased month to month in August, after declining in July.
Year-over-year, overall CPI rose by 2.9%, the worst increase since January, and the fifth acceleration in a row (red)
Core services move the needle.
They include housing costs, medical care, health insurance, auto insurance, tenant’s insurance, subscriptions; telephone, internet, and wireless services; lodging, rental cars, airline fares, education, movies, sports events, club memberships, water, sewer, trash collection, motor vehicle maintenance and repair, etc.
They account for two-thirds of the CPI basket, and that’s where inflation ran over 4% annualized for the second month in a row.
Core services CPI rose by 4.3% annualized in August from July (+0.35% not annualized), after having risen by 4.5% annualized in July, and both were the worst increases since January (blue in the chart).
The three-month core services CPI accelerated to 3.9% annualized, the third month in a row of acceleration (red).
Year-over-year, core services rose by 3.6%, roughly the same year-over-year increases since March.
Housing components of core services.
Owners’ Equivalent of Rent CPI jumped by 0.38% (+4.7% annualized) in August from July, the worst increase since February.
The three-month average jumped by 3.9% annualized.
Homeowners are starting to figure in their cost increases. OER indirectly reflects the expenses of homeownership: homeowners’ insurance, HOA fees, property taxes, and maintenance. It’s the only measure for those expenses in the CPI. It is based on what a large group of homeowners estimates their home would rent for, with the assumption that a homeowner would try to recoup their cost increases by raising the rent.
As a stand-in for homeowners’ expenses, OER accounts for 26.2% of overall CPI and estimates inflation of shelter as a service for homeowners.
Rent of Primary Residence CPI rose by 0.30% (+3.7% annualized) in August from July, the third acceleration in a row.
The 3-month rate rose by +3.2% annualized, the first acceleration four months.
Rent CPI accounts for 7.5% of overall CPI. It is based on rents that tenants actually paid, not on asking rents of advertised vacant units for rent. The survey follows the same large group of rental houses and apartments over time and tracks the rents that the current tenants, who come and go, pay in rent for these units.
Year-over-year, OER rose by 4.1% for the second month in a row. The deceleration has ended (red in the chart below).
Rent CPI (blue) rose by 3.5% year-over-year, an increase that was just a hair smaller than in the prior month.
Rents have shot up by 30% since the beginning of 2020. That spike pales compared to the home price explosion of 43%. But home prices peaked early this year on a seasonally adjusted basis and have started to decline since then.
This is the Zillow Home Value Index for all homes, seasonally adjusted (purple) and the CPI for rent (red), both as index values set to 100 for the year 2000.
Motor vehicle insurance was unchanged in August from July, but was up by 4.7% year-over-year.
Since the beginning of 2020, the CPI for auto insurance has spiked by 57%, but those increases have cooled for the moment – but it won’t last long because used vehicle prices, which form replacement costs for insurers, are surging again (more in a moment).
Motor vehicle maintenance & repair shot up by 2.4% in August from July (+33% annualized), and by 8.5% year-over-year.
The index weighs 1.0% in the CPI basket.
Since the beginning of 2020, the CPI for motor vehicle maintenance & repair has spiked by 44%. Compensation for technicians and prices for replacement parts have shot up since early 2020, and tariffs are now piling on top of it.
This is one place where companies have an easier time passing on costs, any costs, including tariffs on parts, and including fatter profit margins, and it shows in the very high profit margins of the parts & service departments of publicly traded auto dealers: When customers need a repair – maybe the vehicle was towed in or is making a scary sound or the A/C went out in August – it’s not that easy to shop around.
The table below shows the major categories of “core services,” and include food services. Combined, they accounted for 64% of total CPI:
| Major Services ex. Energy Services | MoM | YoY |
| Core Services | 0.4% | 3.6% |
| Owner’s equivalent of rent | 0.4% | 4.0% |
| Rent of primary residence | 0.3% | 3.5% |
| Medical care services & insurance | -0.1% | 4.2% |
| Food services (food away from home) | 0.3% | 3.9% |
| Motor vehicle insurance | 0.0% | 4.7% |
| Education (tuition, childcare, school fees) | 0.2% | 3.3% |
| Admission, movies, concerts, sports events, club memberships | -0.1% | 4.3% |
| Other personal services (dry-cleaning, haircuts, legal services…) | 0.1% | 4.4% |
| Public transportation (airline fares, etc.) | 3.6% | 2.2% |
| Telephone & wireless services | -1.0% | -1.7% |
| Lodging away from home, incl Hotels, motels | 2.3% | -2.6% |
| Water, sewer, trash collection services | 0.4% | 5.3% |
| Motor vehicle maintenance & repair | 2.4% | 8.5% |
| Internet services | 1.2% | -0.8% |
| Video and audio services, cable, streaming | -0.6% | 1.6% |
| Pet services, including veterinary | 0.6% | 5.5% |
| Tenants’ & Household insurance | 0.6% | 5.7% |
| Car and truck rental | -6.9% | -4.8% |
| Postage & delivery services | 1.4% | 4.7% |
Good prices.
Used vehicle CPI jumped by 1.0% in August from July (+13.2% annualized) and by 6.0% year-over-year. Prices have been rising since mid-2024, after the long drop from the historic spike.
Used vehicles weigh 2.4% in the CPI basket.
I have been discussing this for a year: inventories are tight because of the large-scale production cuts of new vehicles in 2021 and into 2022, that had the effect that somewhere between 8-10 million fewer new vehicles were sold in the US over this period, and those vehicles that hadn’t been produced and sold are now missing from the national fleet are not flowing into used-vehicle inventory, such as via rental fleets, lease returns, etc. Tight inventories and decent demand ended the price drop in mid-2024, and since then prices have been rising. This has zero to do with tariffs.
New vehicles CPI rose by 0.28% in August from July, after being unchanged in the prior month, and dropping for the three months before then.
Year-over-year, prices are unchanged. Prices are essentially unchanged since early 2023, after the historic price spike that caused profits at dealers and automakers to blow out.
New vehicles weigh 4.3% in the CPI basket.
Some new vehicles, if imported, are tariffed; and if assembled in the US, some of their imported components are tariffed.
But there are no signs of tariffs getting passed on to consumers. Automakers would love to, but they can’t. All the big automakers have been talking about it in their earnings warnings.
The price spike during the free-money era has made new vehicles too expensive, and now automakers need to throw incentives and discounts at the market to keep sales from falling. It’s a very tough market, and consumers are once again shopping around instead of just paying whatever, which is what they had done during the Free-Money era. And automakers are working on shifting production to the US, but that’s a long slog.
GM, which makes a large portion of its US-sold vehicles in Mexico, China, South Korea, and Canada, and moved much of its supply chains overseas, is among the hardest-hit. Tesla and Honda, whose vehicles are among those with the most US content, are among the least hit.
Durable goods prices overall rose by 0.42% (+5.1% annualized) in August from July, driven mostly by the price spike in used vehicles (+13% annualized).
Year-over-year, the CPI for durable goods rose by 1.9%, also mostly driven by used vehicles (+6.0%).
Inflation in the other durable goods categories is either benign or negative (deflation).
| Major durable goods categories | MoM | YoY |
| Durable goods overall | 0.4% | 1.9% |
| New vehicles | 0.3% | 0.7% |
| Used vehicles | 1.0% | 6.0% |
| Household furnishings (furniture, appliances, floor coverings, tools) | 0.1% | 2.8% |
| Sporting goods (bicycles, equipment, etc.) | 0.1% | -1.3% |
| Information technology (computers, smartphones, etc.) | -0.3% | -5.3% |
Apparel, footwear, watches, and jewelry are largely imported and tariffed. The CPI for this stuff rose by 0.5% for the month, after being flat in the prior month.
Year-over-year, the index was roughly unchanged. The chart shows the price level (not the percentage change). Find the tariffs:
Food Inflation.
The CPI for “Food at home” jumped by 0.6% in August from July, after dipping in July (-0.1%).
Year-over-year, prices rose 2.7%.
Since January 2020, food prices have surged by 29%.
Beef has been a driver for years as US cattle herds have dropped to a 64-year low for several reasons.
Overall beef prices spiked by 2.7% month-to-month and by 13.9% year-over-year.
For example, the average price of a pound of ground beef spiked by 1.0% month-over-month and by 13.3% year-over-year, to $6.32.
Since January 2020, the average price of ground beef has spiked by 63%. This is a years-long issue:
Coffee spiked by 3.6% for the month and by 20.9% year-over-year. Since mid-2021, when this price surge began, the CPI for coffee has surged 46% following global commodity coffee prices:
Egg prices overall were unchanged in August from July, after four months of declines, as they unwind their avian-flu-driven price spike. Year-over-year, the index was still up 10.9%.
For example, the average price of a dozen Grade A large eggs dipped 0.3% in August from July, to $3.59 per dozen. That was still up 12% year-over-year.
From the peak in March, they have plunged by 42%.
But they’d spiked so much in two huge waves during the avian flu period through March 2025 that even after this plunge, they’re still up by 146% from January 2020:
| MoM | YoY | |
| Food at home | 0.6% | 2.7% |
| Cereals, breads, bakery products | 0.1% | 1.1% |
| Beef and veal | 2.7% | 13.9% |
| Pork | 0.2% | 1.2% |
| Poultry | -0.7% | 1.7% |
| Fish and seafood | 0.6% | 2.3% |
| Eggs | 0.0% | 10.9% |
| Dairy and related products | 0.1% | 1.3% |
| Fresh fruits | 1.0% | 1.7% |
| Fresh vegetables | 3.0% | 2.9% |
| Juices and nonalcoholic drinks | -0.3% | 1.5% |
| Coffee, tea, etc. | 3.6% | 20.9% |
| Fats and oils | 0.2% | -1.1% |
| Baby food & formula | -0.9% | 0.5% |
| Alcoholic beverages at home | 0.6% | 0.3% |
Energy.
The CPI for gasoline jumped by 1.9% month to month, seasonally adjusted. But year-over-year, it was still down by 6.6%, on lower oil prices. Gasoline makes up about half of the overall energy CPI.
The CPI for energy overall jumped by 0.7% in August from July but was roughly unchanged year-over-year. Note the year-over-year surge in electricity services and natural gas piped to the home.
| CPI for Energy, by Category | MoM | YoY |
| Overall Energy CPI | 0.7% | 0.2% |
| Gasoline | 1.9% | -6.6% |
| Electricity service | 0.2% | 7.7% |
| Utility natural gas to home | -1.6% | 13.8% |
| Heating oil, propane, kerosene, firewood | -1.1% | -0.8% |
Overall energy prices that consumers pay for directly have plunged by 17% from the peak in mid-2022 but are still far higher than before the pandemic:
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how:
“Fed’s Nightmare, but it’ll cut anyway” Wolf, does it mean it’s getting closer for you to bring out the “The most wreckless FED ever” from the bloom closet soon? I do miss seeing that title around here even though we never stop feeling their wreckless aftermath like the massive housing bubble we’re still reeling through…
They are being told by the executive branch to cut and are having their members replaced to get that done.
It’s not a housing bubble, it’s an everything bubble.
I think the Fed is pretty happy. People are pissed about inflation, but not that pissed, the rich have an even higher percentage of the nation’s wealth and can spend whatever they want on anything. Job losses are off their lows, but still relatively low, and the bigtech companies that hold the stock market together are printing money and capturing greater and greater control over society, most of which money and control goes to the aforementioned rich.
What’s not to like?! Unless of course you’re a young family trying to afford life, of course.
Young family? Those hardly exist today. Just a new a novel way to push of our problems until further into the future.
And people wonder why younger people don’t want to have children.
Because of services inflation, it’s becoming increasingly unaffordable.
Thanks for this detailed report. It makes you wonder why bond investors are jumping all over themselves to buy bonds.
This looks like the except scenario they’d be concerned about, the Fed cutting because of political pressure while inflation continues to be a huge problem.
Just raised the rent on the last couple units for the year between 4.9% and 6.3%
Headline I read this morning while drinking my coffee:
“Dow jumps to record high on rising job losses and increase in CPI”
Someone make it make sense.
Monthly mortgage payments highest in decades, Census Bureau says
CBS: Monthly homeownership costs now top $2,000, new data shows
1:04 PM 9/11/2025
Dow 46,108.00 +617.08 1.36%
S&P 500 6,587.47 +55.43 0.85%
Nasdaq 22,043.07 +157.01 0.72%
VIX 14.71 -0.64 -4.17%
Gold 3,674.60 -7.40 -0.20%
Oil 62.29 -1.38 -2.17%
Mr. Wolf,
Thank you for this analysis. I’ve been looking forward to it all day.
You say the Fed will cut overnight interest rates anyway. Is there any reason to believe they might accelerate QT? Either sell MBS or let a larger value of treasuries mature without replacement each month?
Waller dissented when the Fed slowed QT last spring. He wanted to continue QT at the pace of that time. He is now one of the top 3 candidates for the chairman job. Warsh, former Fed governor, quit the Fed in total frustration when Bernanke forced through QE2, and Warsh wrote a big essay about it. He also want’s to continue or increase QT, but cut short-term rates. He is also one of the top three candidates.
There seems to be a lot of impetus for either continuing or increase QT and cutting short-term rates at the same time, while also shifting the Fed’s holdings from long-term securities to T-bills. And they all want to get rid of the MBS.
Thank you for the information. I’d forgotten about Waller.
A significantly steeper yield curve might be a good outcome.
Waiting for 6%, then will load up on long-term treasuries.
It greatly increases the countries risk profile to do so. It’s more reckless economic policy so current asset holders can keep the party going.
What happens if inflation spikes and there is no choice but to raise rates? Now you’re rolling over short term debt into high rates.
Every politician in Washington should be brought to a special retirement home in the middle of Wyoming and we should put some people that actually care about the future of this country in charge.
So we go from 6 trillion in national debt to 37 trillion in 24 years since 9,11,01 and the FED popped from 1 trillion to 9 trillion at peak not including this being done globally by Western governments…all the financial engineering learned over 2,000 years accelerated within 25 years…hats off these gangstas…
“We will be data dependent” J Powell
“We will see through the data when appropriate” J Powell
See what they did there?
The cheerleading for this Fed cut is unreal. The reasoning is as well.
My guess is rate cut. And, when you can’t hit the target, move it.
Easy money policies continue supported by Mr. Trump.
B
Gee I bet shutting down functioning coal plants has nothing to do with in home energy prices going up
Meh, coal is an outdated fuel with the abundance of clean-burning natural gas.
Unfortunately inflation means the gas costs more to pipe into your home, despite Henry Hub not getting above $3/mmBTU. Many states also surcharge the producers and utilities which pass on those costs to their customers.
“When customers need a repair – maybe the vehicle was towed in or is making a scary sound or the A/C went out in August – it’s not that easy to shop around.”
I wonder how many shops are losing customers to ‘shadetree’ mechanics like myself? I do more and more work in my driveway, both for my own car and my friends’ cars too.
With no overhead and the ability to mail-order parts for planned repairs, I can do the work for significantly cheaper than what a shop can.
Hello Wolf-O-Sphere – While we are talking about the Fed and inflation today, I am interested in your feedback. I present my current investment thesis below. Please tear it apart. All insults and nastiness welcome, as long as you tell me how I can do better as an investor. Key input: I am in my early 60s, and my wealth will outlive me, barring an international black swan disaster (which none of us can invest our way out of). Here goes:
I no longer trust U.S. Government fiscal or monetary policy. When Covid hit, I got burned badly on unprecedented government spending growth, rapid monetary expansion (creation of new money out of thin air), and demand stimulation via wealth redistribution (a.k.a. “The Wealth Effect”). Staying “safe” in U.S. Treasuries during 2020 through 2023 cost me at least 20% in terms of purchasing power lost to inflation and another 10% or 20% of foregone asset valuation growth. Historical equity risk premiums crashed as new investors flush with cash and with no understanding of fundamental financial analysis rushed into the stock market and were rewarded by Federal reserve interventions that created a “too big to fail” mentality for the stock market. My math tells me that equity markets are currently overvalued by at least 15% (and perhaps a hell of a lot more) when viewed through the lens of traditional discounted cash flow analysis.
I expect average U.S. Dollar inflation for the balance of my life to significantly exceed the Fed’s stated target of 2%. Inflation might be steady at around 2% or 3% for long periods, but I expect significant spikes during times of crisis, as during the Covid pandemic. Plus, expanding the money supply is the easiest way for a government with too much debt to reduce the burden of servicing that debt.
Despite the overvaluation of the stock market due to the current asset bubble, for the last couple of years I have been hedging against inflation by dollar-cost averaging a sizable portion of my wealth into stock indexes. Why? Because I have learned the hard way that businesses can manage cost growth with efficiency while increasing prices at a rate that exceeds inflation, even strong inflation. I now believe it is better over the long haul to rely on value-creating businesses (and their pricing power) than on the value-taking U.S. Government.
So, from my perspective, looking out 20 to 30 years nobody will win regardless of whether they hold cash, bonds or equities. Maybe precious metals, real estate and crypto will work out okay, but they are above my pay grade. You have to park your wealth somewhere. I don’t care about winning the most. How can I lose the least? I’m going with equities, or to be more specific, broad total market stock indexes. Good call? Bad mistake? Let me know what you think.
“Because I have learned the hard way that businesses can manage cost growth with efficiency while increasing prices at a rate that exceeds inflation, even strong inflation. ”
In my opinion, they can only do that while the federal government is running gargantuan deficits that ultimately enable that level of spending.
“So, from my perspective, looking out 20 to 30 years nobody will win regardless of whether they hold cash, bonds or equities. Maybe precious metals, real estate and crypto will work out okay, but they are above my pay grade. You have to park your wealth somewhere. I don’t care about winning the most. How can I lose the least? I’m going with equities, or to be more specific, broad total market stock indexes. Good call? Bad mistake? Let me know what you think.”
Whether or not this works will depend on the federal government being able to borrow at reasonable rates, which then ultimately makes its way into the economy as the government spends that money (or gives it to someone else to spend).
There will come a time where the government, both Congress and the Treasury and Fed will have to defend the currency and the bond market or the asset bubble. They will not be able to do both. Right now, the bond and equity markets are priced as though they can do both. I believe that to be incorrect.