The headline, aggregate measure of inflation increased on a seasonally adjusted basis in August. The Consumer Price Index (CPI) increased 0.6%, up from a 0.2% increase in July. Higher fuel prices were a key driver of the increase in August. The core CPI, which excludes Food and Energy, increased 0.3%, which was up from a 0.2% increase in July. Food and beverages, apparel, and transportation saw accelerating increases, with transportation increasing the most, due mostly to a 10.6% jump in gasoline prices and a 4.2% increase in airline fares.
The initial retail sales report for August showed a month-over-month acceleration in consumer spending growth, although the increase was driven by downward revisions to July. The 0.6% increase in retail sales was higher than the 0.1% increase expected and an acceleration from the downwardly revised 0.5% increase in July. The auto sector underperformed the wider retail market, as sales excluding motor vehicles and parts increased 0.6%, while sales of motor vehicles and parts increased 0.3%.
Auto loan performance deteriorated in August as delinquencies and defaults both increased. Sixty-plus day delinquencies increased for the fourth month in a row in August; the subprime loan delinquency in August was the highest for the month dating back to at least 2006. Fortunately, while the delinquency rate has been high all year, it has not resulted in similarly high levels of defaults.
Consumer sentiment, a key metric tied to auto sales, declined week over week, according to Morning Consult. Consumer sentiment increased in June and July, but then declined in August and is down so far in September. Sentiment is now up only 5.1% year over year. The average price of unleaded gasoline increased 1.5% week over week as of last Thursday to $3.87 per gallon, which was up 5% year over year.
Inflation and Retail Sales
Inflation measures accelerated in August, and the latest data has pundits speculating on a further interest rate hike. The next Federal Open Market Committee (FOMC) meeting will be held Tuesday and Wednesday of this week, September 19-20. [Check Smoke on Cars for comments on Wednesday, after the Fed’s announcement.]
Overall, according to the latest CPI measures, inflation jumped up again in August, thanks mostly to increased fuel prices. The headline aggregate measure increased 0.6% month over month on a seasonally adjusted basis, which was up substantially from the 0.2% increase posted in July. The core CPI, which excludes Food and Energy, increased 0.3% in August, which was up from a 0.2% increase in July.
Food and beverages, apparel, and transportation saw accelerating increases last month, with transportation seeing the largest increase caused mainly by a 10.6% jump in gasoline and a 4.2% increase in airline fares. Used cars saw another 1.3% decline, which was less than what Cox Automotive has been tracking in retail used-vehicle prices. New-vehicle prices increased slightly, according to the latest CPI report, after declining in July. Shelter saw a modest deceleration to a 0.3% decline. On a year-over-year basis, overall CPI was up 3.7% in August, an increase from 3.2% in July. Core inflation, however, declined to a 4.3% increase from 4.7% previously.
The initial retail sales report for August showed a month-over-month acceleration in consumer spending growth due mostly to downward revisions to July. The 0.6% increase was much more than the 0.1% increase expected, and an acceleration from the downwardly revised 0.5% increase in July. The auto sector underperformed the rest of the retail market, as sales excluding motor vehicles and parts increased by 0.6%, while sales of motor vehicles and parts increased by 0.3%. Category-level performance was mixed in August. Gas stations (5.2%) and clothing and accessories stores (0.9%) had the largest month-over-month gains. Sporting goods, hobby, book, and music stores (-1.6%), miscellaneous stores (-1.3%), and furniture, home furnishing, electronics, and appliances stores (-0.3%) were the only categories with declines.
Retail sales were up 2.5% year over year on a nominal basis, which was down from 2.6% in July. Compared to last year, five of twelve major categories saw year-over-year declines in August, with gas stations (-10.3%), and furniture, home furnishing, electronics, and appliance stores (-5.4%) down the most. Motor vehicles and parts were up 4.4%, while food services and drinking places (+8.5%) was the category up the most. Adjusted for inflation using the CPI, retail sales declined 0.1% for the month and were down 1.2% year over year.
Consumer Credit and Loan Performance
The Federal Reserve reported that consumer credit excluding housing-related debt saw growth decelerate in July to $10.40 billion from a downwardly revised $14.02 billion in June, driven by dramatically slowing growth in non-revolving debt. Non-revolving debt, which includes auto and student loans, increased by only $0.77 billion following a downwardly revised $14.89 billion increase in June. Revolving debt jumped by $9.6 billion, as credit card debt increased after falling slightly in June.
Auto loan performance deteriorated in August, with delinquencies and defaults both increasing month over month. The 60-day+ delinquencies increased for the fourth month in a row and were up 14.6% year over year. In August, 1.85% of auto loans were severely delinquent. That was up from July’s 1.77% rate and was the highest July rate dating back to at least 2006. The subprime loan delinquency rate was 7.17%, an increase from 6.90% in July and was the highest August rate dating back to at least 2006. The subprime severe delinquency rate was 79 basis points higher year over year, while the aggregate was 20 BPs higher. The delinquency rate has been high all year but has not been leading to a similarly high level of defaults. Defaults, however, increased in August after declining in July. Auto loan defaults in August were up 74.6% year over year.
Access to auto credit improved again in August across most loan channels and lender types. Access to auto credit has now improved for three straight months after tightening this past spring during the banking crisis. According to the Dealertrack Auto Credit Total Loan Index, auto credit availability improved 1.8% in August. However, credit access remained tighter than a year ago.
Movement in credit availability factors was mixed in August. Yield spreads narrowed, the subprime share increased, and the negative equity share increased, and those moves improved credit access for consumers. However, approval rates declined, average terms lengthened, and down payments declined, and, and those moves hurt credit access for consumers. By channel, certified pre-owned (CPO) loans saw the most loosening. On a year-over-year basis, all channels were tighter, with used loans having seen the most tightening. Credit unions loosened the most in August but were tightest year over year.
The index of consumer sentiment from Morning Consult declined 3.1% week over week, as many of the major stock market indexes declined for the week but remain up year to date. Inflation news, higher gas prices, and the UAW strike dominated headlines last week and weighed down consumer sentiment. Consumer sentiment was up 4.4% in June and 2.8% in July but declined 2.3% in August and is down 2.3% so far in September.
New jobless claims and continuing claims are higher than a year ago, but continuing claims are still below pre-pandemic levels. We are not seeing job losses stick and cause stress, and most sectors are still seeing job growth. The labor market is not as strong as it was a year ago, and claims have increased in 2023, but continuing claims remain low and do not represent significant stress in the labor market.