US CPI Somewhere Between a Boil and a Gentle Simmer

In August, US Consumer Price Index (CPI) inflation fell somewhere between a simmer and a boil, surprising observers by surpassing their expectations. Core prices saw a modest uptick of 0.3% month-on-month (m/m), edging slightly above the consensus forecast of 0.2% m/m. Year-over-year core inflation, however, decreased from 4.7% in the previous month to 4.3%, primarily due to favourable base effects. On the other hand, headline prices surged by 0.6% m/m, resulting in a year-over-year increase to 3.7%, largely driven by robust gasoline prices during the month.

Source: Haver Analytics, CIBC

Source: Finlogix Economic Calendar

The Federal Reserve's favoured measure of prices related to underlying demand, specifically non-housing services, climbed from 0.2% in July to 0.4% m/m in August. Some of this increase can be attributed to temporary fluctuations in specific data points, such as spikes in vehicle insurance and airfares. Nevertheless, this development rekindles concerns that the Fed might consider another rate hike in the upcoming fall season.

However, when examining the broader economic landscape, it is evident that the US economy is gradually slowing down, with shelter prices continuing their downward trajectory in the latest release. Despite potential bumps along the way, it is our expectation that the Fed will maintain its current stance throughout the remainder of the economic cycle.

Source: Finlogix Economic Calendar

Service inflation moderated to 0.3% m/m in August, down from the 0.4% rate observed in July and its average pace since March. Both Owner's Equivalent Rent (OER) and rent inflation also decelerated during the month. This trend is likely to persist as newer rental agreements are incorporated into the CPI calculation. Recent research from the San Francisco Fed predicts a substantial slowdown in shelter inflation, potentially turning negative by mid-2024. This forecast should help anchor a broader decline in service inflation and core inflation.

While there were gains across various core service categories excluding shelter, the monthly increase was predominantly driven by the volatile transportation services segment, which rose by a significant 2.0% m/m. Airfares saw a nearly 5% increase in the month, following four consecutive months of weakness. This uptick likely reflects the recent surge in oil prices, suggesting the possibility of further increases as the impact of rising oil costs filters through.

It's important to note that a tight labour market continues to exert upward pressure on core services, excluding shelter.

Core goods prices continued to exhibit weakness, marking the third consecutive month of negative monthly readings. This trend aligns with improvements in supply chains and the effects of tighter monetary policy. Notably, used car prices fell by 1.3% m/m, also experiencing their third consecutive monthly decline. Core goods, excluding used cars, remained relatively flat, consistent with its average pace since April of this year. While demand for goods has remained robust this quarter, prices have remained subdued. With the impact of monetary policy restraint gradually seeping into the economy, there is potential downside risk in this area.

Energy prices saw a significant uptick of 5.6% in the month, primarily driven by an almost 11% gain in gasoline prices. Although higher oil prices continue to pose an upside risk to headline inflation, this risk might be less pronounced for core inflation, considering the broader macroeconomic context, which could have a somewhat deflationary impact. Given stagnant income growth, consumers may have limited spending capacity in other categories, leading to further demand weakness. Food prices increased by 0.2% in the month, maintaining the same pace as in July.

In summary, the implications of these developments call for a cautious approach, and actions should be aligned with a nuanced understanding of the complex economic factors at play.

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