* August consumer prices rose a smaller-than-expected 0.1% in the month following a 0.2% gain in July.
* Core prices also surprised on the downside showing a monthly increase of only 0.1% following a 0.2% gain the previous month.
* The overall year-over-year rate dropped to 1.5% from 2.0% in July.
* The annual increase in core prices rose to 1.8% in August from 1.7% the previous month.
August consumer prices rose only 0.1% following a 0.2% increase the previous month. Expectations going into the report were for a slightly stronger 0.2% increase. The modest monthly increase was in contrast to a much larger energy price-related 0.5% surge a year ago, which resulted in the year-over-year rate dropping to 1.5% in August from 2.0% in July.
The modest overall gain was helped by energy prices dropping 0.3% in the month. This in part reflected gasoline prices dropping 0.1% though the bigger factor was natural gas prices dropping 2.3% in the month following a 2.8% decline in July. Food prices remain surprisingly quiescent, rising only 0.1% in the month with limited evidence to date of last year’s drought providing a major boost to prices.
Excluding both the food and energy components, the so-called core measure surprised on the downside as well, rising only 0.1% following a 0.2% gain in July. Expectations going into the report were for a 0.2% increase. The modest monthly increase did not prevent the annual rate from rising slightly to 1.8% from 1.7% in July.
The monthly increase in core prices was restrained by air fares dropping 3.1%. Household furnishings dropped a much smaller 0.1% though this followed a 0.4% drop in July. These declines helped offset a 0.8% increase in prescription drugs and a 0.6% rise in the medical care component.
Today’s August inflation report indicates that limited inflation pressures are present in the US economy with the annual increase in both the overall and core measures remaining below the Fed’s objective of 2%. Such would argue for the Fed to keep policy highly accommodative coming out of this week’s two-day FOMC meeting concluding on Wednesday. However, the pace of growth is also a factor that will have a bearing on the near-term course for policy. The recent economic data on this score has been mixed although on balance has shown sufficient strength to allow the central bank to start reducing its pace of asset purchases by $10B to $75B per month. This projected lessening of central bank accommodation is intended to assure that inflation remains quiescent.
RBC