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Inflation is getting sneakier

Yahoo Finance's Rick Newman breaks down the categories where inflation is creeping up even as energy prices fall.

Video Transcript

- Americans are digesting the latest inflation measure for the Bureau of Labor Statistics. Consumer price inflation came in hotter than estimated. Missing what economists have been looking for 10 basis point decline.

This lends support to the Fed's raise and hold narrative ahead of its Tuesday meeting, where it's expected to raise rates another 75 basis points. Yahoo Finance's Rick Newman joins us now to discuss. Rick, you have been monitoring all along kind of how inflation is perceived. And as you write for Yahoo Finance, inflation is getting sneakier. Please explain.

RICK NEWMAN: So we know gas prices, gasoline prices that is. We know they've been coming down by a ton during the last few months. And every consumer in America knows that because they see these prices advertised in every town in America in those two-foot high numbers. But there's some sneaky inflation that people may not be noticing.

And I noticed two categories in the latest report. The first is household energy where we are still seeing significant double-digit year over year inflation numbers. And think natural gas, this has a lot to do with natural gas.

And if go and look at the Henry Hub price or natural gas futures prices, they are more than twice what they were a year ago. This is kind of snuck up. It does have something to do with the Russian war in Ukraine, and skywriting-- skyrocketing gas prices there. Because we're basically now exporting as much natural gas as we can through liquefied natural gas facilities, LNG facilities.

And natural gas matters because that's how a lot of utilities produce electricity by burning natural gas. So I think we're seeing more expensive electricity, which factors through to manufacturing. Manufacturers obviously need a lot of electricity. And it factors through to food. I mean, food takes a lot of energy to produce as well, and that's the second category where we're seeing inflation actually getting worse rather than better.

So food inflation in the most recent month, 13.5% on an annualized basis, that is the worst number since 1979. So that is, to my mind, the two reasons why we got kind of a negative surprise on inflation in this latest report.

- So what do you expect the reaction from the White House to be especially months ahead of the midterm elections? we know that the President has been very kind of full-throated about where some of the inflation reduction efforts can and should continue to move forward.

RICK NEWMAN: Biden put out a short statement earlier today, the first thing he said was, yay, gasoline prices have fallen by $1.30 a gallon since June. But we still have more work to do. And I think that's the basic tone we're going to get from Biden and his fellow Democrats leading up to the midterm elections, which are now in less than two months.

We've only got one inflation report left before the midterm elections. We've got two Federal Reserve meetings. The one that's coming next week, and then we have one at the very beginning of November.

So it seems pretty clear the Fed is going to do a 75 basis point hike 3/4 of a percentage point next week. And then what's going to happen? I'm not sure what's going to happen after that. But I think what you're going to hear Biden saying, is he's just going to keep talking about gas prices because that's the good story, and he's going to continue to say we have more work to do on food and other categories.

- We have seen pretty consistently over the past few months, this inverse relationship between the president's approval rating and gasoline prices, do you think as gasoline prices continue to come down, but as we've talked about, prices for other things maybe stay elevated, that relationship is going to break down at all? Or do you think it's going to continue to track?

RICK NEWMAN: It's a great question. I think Biden is going to be OK until we get the next set of numbers. I think his approval rating has come up from a low of about 38%. Last time I looked it was 43 or 44%.

So that's a modest improvement. That's not great. And a 44% approval rating for the President is not good news for the president's party going into the midterm elections. I mean, for the Democrats to have a good shot based on the president's popularity alone, it would-- I think it would have to be 50% or higher.

But I think that a lot of people will hear that core CPI is higher than expected in this report. But I really think that people respond more to gas prices because they're so tangible, and they're so intuitive, and they're right there in front of everybody's face. And I think they're going to respond a little less to the kind of stuff we're talking about, which is natural gas prices, which nobody ever sees.

I don't know how many consumers actually look at the fine print of their utility bill and follow the natural gas price or what they're paying per therm, for gas, or per kilowatt hour for electricity. So that kind of inflation is, sort of, hidden. So I think Biden's OK, and then when we get to the winter, if people's heating bills start to soar, that's when people are going to really feel natural gas price inflation if it's still there. And that would be bad for Biden.

- Yeah, I think safe to say. Thank you so much, Rick. Really appreciate it.