While everyone was focused on Headline CPI, and understandably so, the bigger potential issue inside of the CPI readings is Services inflation. While energy prices plunged on a year-over-year and month-over-month basis, Core CPI, which excludes volatile assets such as food and energy, jumped greater than estimated. More specifically, Services inflation saw its 12th straight month of expansion, jumping +0.6% in August and +6.8% year-over-year. This is the worst increase since October 1982. Given that services are such a large part of the U.S. economy, and with the focus on Core CPI which the U.S. Federal Reserve pays closest attention to, it appears that inflation continues to remain entrenched even though goods inflation continued to decline.
The combination of all these factors could mean that inflation is far from peaking, especially when also considering that wages have risen over 17 straight months and wage growth continues at record levels. This could mean that the U.S. Federal Reserve will have to be much more aggressive in raising interest and destroying demand causing significant potential headwinds for equities and fixed income investors alike.