The 0.2% headline CPI for August was higher than the expected reading of 0.1%; this follows an unchanged reading in July. The core rate was also little above the expected reading at 0.3%, following an increase of 0.1%. On a 12-month rate-of-change basis, the seasonally adjusted headline and core rates are now 1.1% and 2.3% higher, respectively.
The CPI’s energy price index was again unchanged in August. If we exclude the effects of energy, the CPI would still have been 0.2% higher sequentially in August and was 2.0% higher than a year ago. The CPI excluding food prices would have been 0.2% month-to-month and was 1.0% higher year-over-year. Food and energy combined account for slightly less than 25% of the entire CPI. Among the major core components, the BLS reported that the index for shelter (which is 33% of the CPI) rose by 0.3%, medical care by a strong 1.0%, hospital services 1.0%, and motor vehicle insurance also rose, this time by 0.5%—the 10th consecutive monthly increase. Any drag largely came again from used cars and trucks (the sixth consecutive decline), and household furnishings and operations, airline fares, and recreation).
It is once again worth noting that the “services less energy services” component of the CPI accounts for 59.8% of the entire index and is growing by 3.2% annually. This has been an important anchor helping offset any commodity-related decreases in prices.
August’s increase in the CPI was again largely driven by the main components of shelter and medical care. Energy prices were a neutral drag again, following several months of improvement prior to July. With the economy closer to full employment, we should start to see some increase in wage growth; so far, any increases have been spotty and mixed, with the overall trend still fairly muted, which has only heightened the scepticism surrounding the predictability of the Phillips Curve (something which Fed Governor Lael Brainard discussed earlier this week). With demand growth also still relatively lackluster despite the best efforts of the central banks globally, inflation also as a whole remains relatively quiescent. In the divergence between the Fed’s target measure, the PCE deflator, against the CPI, the difference largely accounted for by the weightings for shelter and medical care. Meanwhile, with regard to inflationary expectations, TIPS yield spreads are still extremely low (likely suffering from some liquidity issues hampering their usefulness as an inflation gauge). Inflation expectations from the University of Michigan’s survey, however, which have no such liquidity issues, are also still showing longer-term expectations near the lowest they have been since at least 1990. Bottom line, despite a tighter labour market, it is still possible that there is enough slack to keep wage and inflationary pressures low. On the demand side, growth seems to have slowed over the last couple of months, to enough of an extent that a rate increase by the Fed (which in our minds was always a very slim possibility) should now be off the table completely, this report should not change this.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.