Fynsa
The U.S. Consumer Price Index (CPI) rose 0.6% in August, a result in line with expectations. This was the largest monthly increase in just over a year, although this strength is largely tied to a 5.6% increase in energy prices during the month.
Setting aside energy prices, the monthly increases in food prices (0.2%) and core prices (0.3%) were much more subdued, although the core reading was slightly above expectations. However, even with the upward surprise in the core measure, it still appears that the overall trend in core inflation is moderating, and the year-over-year rate cooled from 4.7% to 4.3% between July and August.
By sector, prices for basic goods fell 0.1% in August, while prices for basic services rose 0.4%. The core goods index has now declined for three consecutive months and has changed little in net terms over the year (+0.2% year-to-date). The core services index has been much firmer recently, although the inflation trend in this category also appears to be moderating. Rent inflation remained solid in August (tenant rents: 0.5%; owner-equivalent rents: 0.4%), although the pace of inflation for these measures has been easing recently. The trend in core services inflation, excluding these rent measures, also appears to be moderating.
The “glass half full” perspective on this inflation report is that any of the last three months’ core inflation figures have been the lowest since September 2021. The glass-half-empty view is that August’s core CPI wasn’t as low as in the previous two months and came in slightly above expectations.
The next question is this: if much of the recent rise in inflation is due to higher energy prices, how much of that should concern us in terms of a more sustained rise in inflation? The answer can be found in a recent report by MS, which estimates that a 10% increase in oil prices adds 35 basis points to the overall CPI over three months, but only 3 basis points to the core CPI. Thus, higher energy prices must persist for some time to have a greater and more lasting effect.
Otherwise, beyond the short-term impacts of inflation, no major changes are evident in medium- and long-term expectations, as measured by inflation break-even rates.
Finally, the details of the August CPI report are consistent with the expectation that the Fed will remain on hold ahead of next week’s meeting and that it will “weather this shock” in energy prices; and while the discussion of resuming rate hikes starting in November or December will remain on the table, we believe we have already reached the peak of this tightening cycle, as highly restrictive financial and credit conditions will begin to have a stronger impact on economic activity in the coming quarters and pave the way for greater convergence in inflation.
