US Consumer Prices to Slow in August

The monthly inflation report for August will be coming out later today during the US trading session. Inflation expectations, based on the economists polled, point to a moderation in the data.

Economists forecast that inflation will rise 0.1% on the month in August. This comes after a 0.3% increase in July.

Meanwhile, on a year over year basis, headline inflation will likely remain steady at 1.8%.

The core inflation rate, which excludes the volatile food and energy prices, is expected to rise by 0.2%, slowing from the 0.3% increase in July. This is expected to bring the yearly core inflation rate to rise 2.3% on the year, up from 2.2% previously.

Inflation remains subdued although it is close to the Fed’s 2.0% inflation target rate. Following a strong performance in July, consumer prices could recede from the highs in July.

The inflation data comes ahead of the September Fed meeting. Investors are discounting a quarter basis point rate cut. The cut comes amid a mix of slowing growth and inflation which has remained stubbornly low.

U.S. CPI
U.S. CPI and Core PCE Price Index

Could Lower Gasoline Prices Pull Inflation Lower?

The basis for lower expectations on inflation comes partly due to lower gasoline prices. Gasoline prices peaked in July, partly contributing to the higher inflation figures.

However, around mid-July, gasoline prices have been steadily declining. This potentially translates to lower consumer prices over the month. But, offsetting weaker gasoline prices, are the US shelter prices.

Data as of July showed that shelter prices remained robust during the month. It is unlikely that we could expect to see a decline in August.

Meanwhile, the price of WTI Crude oil stayed somewhat subdued from July’s performance. 

Oil prices were down over 4.5% during August. This could potentially signal some weakness that could seep into the monthly inflation data.

Chances Are High That Inflation Report Could Be Overlooked

Considering the timing of the inflation data, it is quite likely that investors will look past the report. The Federal Reserve is due to meet on September 18th. The likelihood of a quarter basis point rate cut is priced in.

This comes after last week’s labor market report which came out mixed. While wages rose, the pace of jobs added during the month was weak. At the same time, the past revisions to data also remain to the downside.

Given the ongoing trade war between the US and China, it is quite likely that a surprise beat on the inflation estimates will change the Fed’s view on rates.

As a result, the inflation report could be largely ignored by market participants.

However, the underlying trends in inflation are something to look into. There is a good chance that inflation could slowly rise close to the Fed’s inflation target rate of 2.0%. The question is whether the Fed will remain patient enough for this to happen.

The central bank has come under pressure, especially from President Trump, to do more to lower borrowing costs.

Recent data covering the personal consumption expenditure or PCE showed that inflation rose by 1.4% on the headline and 1.6% on the core in July. The core PCE has been consistently below the Fed’s inflation target rate of 2.0% for the most part of 2019.

The recent patch of economic data from the US continues to give a mixed picture.

Within this context, we could, therefore, expect to see inflation to reflect the same as well. A subdued reading is perhaps only going to strengthen the conviction that the central bank will cut rates in September.


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