Consumer prices rose 0.2% in August, slightly below expectations. Core CPI (excluding food and energy) was also a little softer than expected, rising 0.1% on the month – the smallest increase since April.
The August softness saw headline inflation ease two ticks to 2.7% year-on-year. Similarly, the core rate fell back to 2.2%.
Energy prices rose 1.9% (month-on-month), snapping back from two months of declines. Food prices were up a modest 0.1%.
Core goods prices once again fell into negative territory, down 0.3% on the month. After heating up in July, core services prices moderated to 0.2%. However, key services categories remained hot. Owners’ equivalent rent rose 0.3% in August, and is up 3.3% versus a year ago. Rent prices were even hotter, up 0.4% in August and 3.6% versus a year ago. Medical care services (-0.2% m/m), communication (-0.2%) and recreation and personal care (both -0.1%) leaned against these price increases.
Key Implications
The August inflation report shows that while inflation has picked up over the course of 2018, there are few signs of a breakout in price pressures. A strong U.S. dollar and a competitive retail sector are clearly helping to keep a lid on core goods prices. Services price pressures are hotter overall, but haven’t really broken above a 3% pace since the spring.
Overall, we expect inflationary pressures to pick up slightly over the coming quarters. There is little debate that the labor market is tight, and domestic demand is being buoyed by tax cuts and spending. A strong U.S. dollar is helping to keep a lid on price pressures for many imported goods. This backdrop supports our expectation for a continued gradual pace of rate increases, with hikes looking likely at the September and December meetings.
