The headline consumer price index (CPI) ticked up 0.4% in August, slightly above market expectations. Inflation on a year-on-year basis moved up to 1.9% in August.
Delving into the details, a 2.8% pop in energy prices on the month and a 0.5% increase in shelter costs were the main culprits lifting headline inflation in August. Food inflation remained fairly tame, up just 0.1% on the month, and a mere 1.1% year-on-year.
Core inflation finally broke out of its 0.1% funk, rising 0.2% on the month – and a strong 0.2 at that given the 0.248 print to three decimal points. Still, that left core inflation at 1.7% year-on-year, a pace that has been steady for four months now.
The core measure, along with shelter price increases, was led by motor vehicle insurance (+1.0% m/m), medical care (+0.1% m/m) and recreation (+0.2% m/m). Shelter is highly important for inflation, accounting for one third of the CPI basket. As such, the 0.5% rise carried some weight. Within shelter prices, all categories gained momentum including rent, owned housing and lodging away from home.
The tug of war in core inflation between soft goods prices (-0.1%) and rising services prices (+0.4%) continued in August, with services gaining speed as of late. Still, it wasn’t enough to lift the annual pace of core services, at 2.5% y/y in August. Meanwhile core goods prices remain in deflationary territory, down 0.9% from a year ago – a pace that has been reasonably steady over the past year.
The BLS cited that Hurricane Harvey had a very small effect on survey response rates in August, with price collection disrupted in 2 of 87 collection areas.
Key Implications
Phew! The sigh of relief among economists forecasting the U.S. economy is surely audible. Analysts have been increasingly worried that the Phillips curve, or the relationship between the unemployment rate and inflation, might be dead, or at least on life support. August’s CPI report provides some reassurance that it may be unwise to write it off yet. However, with core inflation still below 2% it will take more than a month of good data to convince the FOMC that inflation is well on its way to target. Moreover, there may still be poorly understood structural forces restraining inflation.
That said, the uptick in services inflation was most encouraging, as it is most closely tied to conditions in the domestic economy. While goods inflation is still feeling the effects of a stronger U.S. dollar in recent years. We expect those exchange rate impacts will ebb, and goods prices should help lift inflation higher over the coming two years.
Next week, the Fed is expected to starting the process of balance sheet normalization. The likelihood that the Fed would raise rates once more in 2017 had been looking increasingly iffy as the softness in inflation dragged on. Today’s CPI report provides some reassurance that there are signs of life in price pressures in the U.S. economy, and makes a December rate hike look more likely.
