US: Inflation Firms Further in August

• Headline inflation cooled a bit in August, as CPI prices rose a modest 0.1% on the month, taking the year-on-year pace down a tick to 1.7%.
• Core prices were steamier, up 0.3% for the third consecutive month. This comes after a string of softer readings earlier in the year, and has driven the core inflation rate higher on a year-on-year basis. It was 2.4% in August.
• Increases in the indexes for medical care (+0.7% m/m), shelter (+0.2%), recreation (+0.5%), used cars and trucks (+1.1%), airline fares (+1.7%) and personal care (+0.3%) all contributed to the stronger core reading. Rising costs for medical care, and more specifically hospital services (+1.4%) and over the counter drugs (1.6%) were behind the acceleration in medical care costs.
• New vehicles continues to be one area of falling prices, down 0.1% in August, and are up only 0.2% versus a year ago. It’s costing less to fill those new cars with gas too. Gasoline prices were down 3.5% in August, and are 7.4% lower than a year ago.
• Zooming out, inflation in both core services and goods continued to firm. Core goods prices rose 0.2% in August, and are now 0.8% higher than a year ago. This category was in deflationary territory for most of the 2013-2018 period, but the impact of tariffs on many imported goods is likely increasingly being passed on to consumers. Core services inflation was 2.9% in August. It has heated up after some softness earlier this year, due in large part to big swings in the cost of medical care services.

Key Implications

1. Core inflation has now re-attained it’s cycle peak of 2.4% after a period of softness earlier in the year. That said, 2.4% is not really a threatening level. The Fed’s preferred core inflation measure, core PCE, inflation is typically a few ticks lower than CPI, so it is likely to still be close to the Fed’s 2% target.
2. It is difficult to say that the tariffs are having no impact on U.S. consumers. Prices for a host of goods, which are typically imported, have been trending up since tariffs were increased. This is likely to continue with the latest round of import tariffs on China coming into effect in September. The Fed will treat price increase due to tariffs as a tax, which slows growth, and not as an indication of accelerating price pressures economy-wide. Therefore, there is little in August’s inflation data to prevent the FOMC from cutting rates at their meeting next week.