Overall, today’s soft inflation data support the Fed’s view that substantial slack still remains in the economy. As a result the CPI report raises the risk that the Fed will refrain from changing its FOMC statement today in a more hawkish direction.
US August CPI inflation data were much weaker than expected. The biggest surprise was that core CPI was unchanged over the month for the first time since October 2010. Over the past 12 month, CPI and core CPI are both up a modest 1.7% in August, significantly weaker than the 1.9% consensus and Nordea estimates.
Given the typical gap between CPI and PCE inflation, this is consistent with core PCE inflation around 1.3%, marginally up from the 1.2% recent low and still well below the Fed’s 2% longer-run target.
With the core CPI, airline fares (-4.7% after a nearly 6% drop the prior month), recreation (-0.4%), apparel (-0.2%), and education (-0.1%) and medical care (unchanged from the first time this year) prices were particularly soft in August. Owners’ equivalent rent (31% of core CPI) advanced 0.2% in August, well in line with the recent trend. Energy prices fell 2.6% in August, its largest decline since March 2013, while food prices rose 0.2%.
Overall, the soft inflation data support the Fed’s view that substantial slack still remains in the economy. As a result the CPI report raises the risk that the Fed will refrain from changing its FOMC statement today in a more hawkish direction.
Nordea