Low Energy Prices Hold CPI Down

The Consumer Price Index (CPI) rose a tepid 0.1% in August, after jumping 0.3% in July. The year-over-year reading on the CPI slowed to 1.7% in August from a 1.8 pace in July. A 4.4% drop in energy prices from a year ago was the primary factor holding prices in check. Prices at the gas pump fell more than 7% from August 2018. Food prices were unchanged during the month, with a drop in prices at grocery stores offsetting increases in prices at restaurants and bars. The overall CPI has remained less than 2% on a year-over-year basis since last December.

Core CPI (excluding food and energy prices) bucked the trend in overall inflation and accelerated again in August. Core CPI rose 2.4% on a year-over-year basis to the biggest jump since fall of 2008. That marks the third monthly acceleration in the core CPI and will provide pause for those within the Federal Reserve system who were already uncomfortable with interest rate cuts.

The core CPI tends to run hotter than the core Personal Consumption Expenditures (PCE) measure of inflation, which the Fed is targeting at 2%. So far, the rise we have seen in the core CPI has not shown up in the core PCE, but that could be only a matter of time. The two series tend to move with each other over time.

In fact, the acceleration in the core CPI was broad-based and covered services as well as some goods. The largest monthly gain showed up in used vehicle prices, which helped trade-in values. New car prices were the only sector outside of food and energy to post a modest decline. Next up was the cost of medical services, which is pinching the budgets of retirees. Medical care services are now running 4.3% above a year ago, more than double the pace of overall inflation.

Shelter costs and prescription drug prices also continued to move up along with airfares, which have been boosted by fewer flights due to the grounding of the Boeing 737 Max. There was some moderation in the pace of increase in rents and owner’s equivalent rents. The latter is affected by home prices, which have softened despite lower mortgage rates this year.

Bottom Line
Overall inflation remains muted because of low energy prices. The job of convincing the Fed to do more in the absence of more economic weakness just got a bit harder for Fed Chairman Jay Powell. He will sway the majority to do another quarter-point rate cut next week, but not without additional dissents.

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