U.S. Inflation Picks Up

Inflation may finally be getting back on track to reach the Federal Reserve’s goal, as the U.S. cost of living accelerated following a weak stretch, Labor Department data showed Thursday.

Highlights of Consumer Price Index (August)

  • Consumer-price index increased 0.4% m/m (est. 0.3% gain) after 0.1% rise the prior month; rose 1.9% y/y (est. 1.8%)
  • Excluding food and energy, so-called core CPI rose 0.2% m/m (matching est.) after rising 0.1%; up 1.7% y/y (est. 1.6%) after 1.7% advance
  • Increase in core index driven by biggest gain in shelter since 2005; lodging category rose by a record, rebounding from a drop that dragged down inflation in the previous month
  • Key Takeaways

    The 0.2 percent rise in the core gauge ends a five-month streak of weaker-than-expected readings, and may soothe some concerns that inflation is slowing more broadly, though it will take more readings to determine whether the pickup can be sustained. The increase in the lodging category indicates the earlier decline in the sector was transitory.

    Energy prices rose by the most since January and may reflect some impact from Hurricane Harvey. CPI data is collected throughout the month, and since the storm occurred in late August, the Bureau of Labor Statistics expects most of the data to come from before the storm, BLS economist Steve Reed said Wednesday. Data collection was disrupted in two of the 87 U.S. urban areas where prices are gathered.

    Economists have said headline inflation measures could remain elevated for several months as the data more fully incorporate the fallout from Harvey and Irma.

    The improvement, were it to persist, would make it more likely that the Fed will raise interest rates in December. Policy makers meeting next week are expected to keep rates on hold while announcing the start of a gradual process to shrink their $4.5 trillion balance sheet.

    Over time, businesses may get more pricing power as household spending climbs, while the steady labor market, the weakening dollar and improving global demand would also help to boost inflation.

    The Fed’s preferred gauge of inflation, a separate Commerce Department figure based on consumer purchases, has matched or exceeded the central bank’s 2 percent goal in only two months of the past five years. Some Fed officials focus on the measure excluding food and energy, which is also below their target.

    Other Details

  • Lodging away from home rose by a record 4.4 percent; included a 5.1 percent rise in hotel costs, the most since 1991
  • Broader shelter costs rose 0.5 percent; 0.3 percent increase in owners-equivalent rent, one of the categories designed to track rental prices
  • Energy prices rose 2.8 percent from previous month, reflecting jump in gasoline; food costs advanced 0.1 percent
  • The CPI for new vehicles was unchanged, the first month without a decline since January, while prices of used cars and trucks fell 0.2 percent; air fares dropped 1 percent
  • Wireless-phone services fell 0.1 percent
  • Expenses for medical care rose 0.1 percent from the previous month, while 1.8 percent annual gain was smallest since 1965; these readings often vary from results for this category within the Fed’s preferred measure of inflation due to different methodologies
  • Hourly earnings adjusted for inflation rose 0.6 percent from August 2016, after a 0.7 percent gain, according to a separate report from the Labor Department
  • The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rents
  • Bloomberg

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    Dean Popplewell

    Dean Popplewell

    Vice-President of Market Analysis at MarketPulse
    Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
    Dean Popplewell