The Consumer Price Index (CPI) rose 0.2% month-on-month (m/m) in August, bang-on the consensus forecast. On a twelve-month basis, CPI fell to 2.5% (from 2.9% in July).
- Energy prices (-0.8% m/m) were a drag on headline inflation, with both energy commodities and energy services lower on month. Food prices remained largely subdued, rising 0.1% m/m and are up 2.1% year-over-year (y/y).
Excluding food and energy, core prices rose 0.3% m/m, following a gain of 0.2% m/m in July. This came in above the consensus forecast, which called for a more modest gain of 0.2% m/m. The twelve-month change on core held steady at 3.2%, while the three-month annualized ticked up to 2.1% (from 1.6% in July).
Price growth on core services rose 0.4% m/m, a slight acceleration from the 0.3% m/m gain recorded the month prior.
- Shelter costs unexpectedly rose by 0.5% m/m, higher than the 0.4% m/m gain recorded in July. The uptick was largely driven by a further gain in Owners’ Equivalent Rent (OER), which rose 0.5% m/m, or a tick above the monthly gain averaged over the twelve-months prior – suggesting some mean reversion in the months ahead.
- Non-housing services inflation (aka ‘supercore’) also accelerated last month, rising by 0.4% m/m. The gain was largely driven by a further increase in motor vehicle insurance (+0.6% m/m) and travel related costs including airfares (+3.9% m/m) and lodging away from home (+1.8% m/m). However, the three-and-six-month annualized rates of change remain relatively subdued at 1.4% and 2.9%, respectively.
Core goods prices declined by 0.2% on the month, largely due to a further decline in in used vehicle prices (-1.0% m/m), medical & education commodities (-0.4% m/m) and home furnishings (-0.3% m/m). Goods prices have been flat or have registered a decline in each of the last 15 months.
Key Implications
This morning’s inflation report was another reminder that there’s going to be bumps in the road in returning inflation back to the Fed’s 2% target. That said, the uptick in core was largely driven by an unexpected gain in shelter costs (mainly related to OER), which is unlikely to persist. Encouragingly, core goods prices remain in deflation, while overall price pressures on non-housing services remain relatively subdued.
In our view, the August readings of employment and inflation have done little to strengthen the case for a larger 50 basis point (bps) rate cut next week. Instead, the Fed is likely to play it cool and cut rates by just 25 bps, but also signal more easing in the months ahead. We suspect that the FOMC’s revised “dot plot” included in the Summary of Economic Projections (released simultaneously with the September 18th interest rate announcement) is likely to show a total of 75 bps of easing (previously 25 bps) by year-end.
, which is unlikely to persist. Encouragingly, core goods prices remain in deflation, while overall price pressures on non-housing services remain relatively subdued.){kind=link}