U.S. consumer price inflation rises above expectations in August on sharp rise in energy prices

The recent sharp deceleration of the core consumer price inflation in the U.S. seems to have conceded; however, it is not yet reversing. Still, the momentum in the core prices has rebounded considerably in the past few months. The U.S. Fed is expected to remain on course, noted Nordea Bank.

The headline CPI inflation rate was up 0.2 percentage points to 1.9 percent year-on-year in August, as compared with consensus expectations of 1.8 percent. The rise was driven by a 2.8 percent month sharp rise in energy prices that came after the Hurricane Harvey that hampered nearly 20 percent of U.S. refining capacity.

The core inflation rate remained the same at 1.7 percent in August as compared with 1.6 percent, underpinned by a strong 0.5 percent monthly gain in shelter costs correcting recent weakness. In the past three months, the core inflation is up at an annual rate of 1.9 percent (Jun-Aug), illustrating that momentum had rebounded significantly since May, when the three-month rate of change roughed at 0 percent. A core CPI inflation rate at 1.7 percent is in line with a core PCE inflation rate, the Fed’s preferred measure, at an unchanged rate of 1.5 percent in August, well below the 2 percent target.

For a Fed attempting to convince itself that the recent deceleration in core inflation is temporary, a stable print of 1.7 percent in August is not encouraging, stated Nordea Bank. However, temporary factors continue to play a huge role, as the Fed continues to underline. Stripping prices of medical care, mobile phone services, hotel rooms, and vehicles, core rate was 2.4 percent year-on-year in August, close to a multi-year high. The recent softness in these categories is not necessarily evidence of cyclical weakness in the economy.

Over the course of the next few months, core inflation rates could move further below the 2 percent target, driven by adverse base effects due to the relatively sharp price rises in the second half of 2016. But core inflation rates are expected to pick up again in 2018, driven by pass-through from higher energy prices and the weaker dollar, higher resource utilization and the dropping out of earlier sharp price declines that seem unlikely to be repeated in 2018, said Nordea Bank.

The one-off declines in core consumer prices in March would continue to hold down the core inflation rate on a 12-month basis until the fall in prices for mobile phone services falls out of the year-on-year numbers in March 2018.

Overall, the weak inflation prints are unlikely to have any implications for when the U.S. Fed will announce plans to start normalizing its balance sheet, which is likely to take place next week.

Still, inflation will have to rebound for the Fed to justify hiking rates again in 2017, but there time since the next rate hike is not expected before December.

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