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Inflation Abates Slightly in August

RFP
The CPI rose 0.2% in August from July and 2.7% from one year ago. That represents a slight moderation in the pace of inflation, which rose at 2.9% year-on-year in July.

The core CPI (excluding food and energy) actually edged upl 0.1% in August and moderated to a 2.2% year-over-year rate in August, down from 2.4% in July. Three categories accounted for nearly all of the moderation: apparel prices, prescription drug prices and medical care costs, all of which posted declines for the month. The drop in health care costs will not last; apparel prices could get a jolt from an expansion of tariffs on Chinese consumer goods. So far, the administration has held back on implementing the additional $200B in tariffs it has in the pipeline, which would start to directly affect consumer goods as opposed to the indirect impact from higher input prices for producers.

Transportation services, which have been on a tear due to escalating shipping costs, received an extra boost from a surge in airfares. We have also seen the airlines hike fees on everything from baggage fees to particular seats; an exit row or an extra inch or two in leg room will cost you.

Vehicle prices edged higher after surging in July. That was largely in response to the higher input costs associated with steel and aluminum tariffs. The vehicle industry warned about this in July. In fact, goods prices in general are picking up after a long hiatus. A stronger dollar is also finally seeping into the equation on import prices.

Look for some moderation in energy prices next month, which will help to keep overall inflation from surging. A pick-up in energy costs one year ago will make for an easier year-on-year comparison. Real wages, in particular, could finally get a boost from the combination of rising wages and moderating prices at the gas pump. Core inflation should remain on an upward trend, which will give the Federal Reserve plenty of reasons to raise rates in both September and December.

Bottom Line
The moderation in overall inflation is expected to continue as a drop in energy prices limit will year-over-year gains. The moderation in core price inflation, the best predictor of future inflation, appears to be transitory. That will provide justification for the Fed’s shift in focus from normalizing monetary policy to further tightening in 2019.

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