Inflation cools as US core consumer prices slow sharply in August

Speculation grows on when Fed will announce scaling back of bond-buying process

The US Labour Department said on Tuesday its Consumer Price Index, excluding the volatile food and energy components, edged up 0.1 per cent last month. Bloomberg

Underlying US consumer prices increased at their slowest pace in six months in August, suggesting that inflation had probably peaked, though it could remain high for a while amid persistent supply constraints.

The US Labour Department said on Tuesday its Consumer Price Index, excluding the volatile food and energy components, edged up 0.1 per cent last month. That was the smallest gain since February and followed a 0.3 per cent rise in July. The so-called core CPI increased 4.0 per cent on a year-on-year basis after advancing 4.3 per cent in July.

The overall CPI rose 0.3 per cent last month after gaining 0.5 per cent in July. In the 12 months through August, the CPI increased 5.3 per cent after soaring 5.4 per cent year-on-year in July.

Economists polled by Reuters had forecast the core CPI gaining 0.3 per cent and the overall CPI rising 0.4 per cent.

Inflation heated up at the start of the year, driven by soaring prices for used cars and trucks, as well as services in industries worst affected by the Covid-19 pandemic.

There are signs that the used cars and trucks price surge has run its course. Hotel and motel accommodation prices are now above the pre-pandemic level, suggesting moderate gains ahead.

The slowdown in monthly inflation rates aligns with Federal Reserve Chairman Jerome Powell's long-held belief that high inflation is transitory.

But bottlenecks in the supply chain remain and the labour market is tightening, pushing up wages.

A shortage of homes is driving record house price gains and rents are going up as vaccinations allow companies to recall workers back to offices, pulling Americans back to cities following a pandemic-fuelled exodus to low-density areas. These factors could contribute to keeping annual inflation higher.

“If there is any relation between the real world and government data, we may start to see the enormous increase in home prices and rents filter into the CPI,” said David Donabedian, chief investment officer of CIBC Private Wealth US, in Baltimore.

The government reported last week that producer prices increased solidly in August, with the PPI posting its largest annual gain in nearly 11 years.

The CPI report comes as speculation is growing in financial markets on when the Fed will announce it will start scaling back its monthly bond-buying programme. Mr Powell has offered no signal on when the US central bank plans to cut its asset purchases beyond saying it could be “this year".

The Fed's preferred inflation measure for its flexible 2 per cent target, the core personal consumption expenditures price index, increased 3.6 per cent in the 12 months through July after a similar gain in June. August's data will published later this month.

“Recently broadening wage pressures across sectors could lead to more broad-based increases in services prices,” said Veronica Clark, an economist at Citigroup in New York.

“Strong increases in 'transitory' price components over the last few months will keep the annual pace of inflation elevated for some time, implying that it will be more important to assess the details of inflation data to gauge the persistence of inflationary pressures.”