U.S. August CPI - Telephone services, air fares and hotels lift the core rate
August CPI is not a shocker at 0.4% overall, but the core rate of 0.3% ex food and energy is above expectations and where the Fed would like it to be and suggests tightening on September 16 is now likely. Before rounding core CPI rose by 0.29% and overall CPI by 0.396%. Telephone services are the main cause of the upside surprise on the core rate.
Food was subdued with a second straight rise of 0.1% but energy increased by 2.1% with gasoline at 3.9%. The gasoline price rise comes after two straight declines and recent gains in oil prices suggest there is more to come in September.
Commodities less food and energy rose by 0.1% and look subdued outside autos. Used autos saw a second straight 0.4% increase while new autos rise by 0.3% after a 0.1% increase in July. The trade conflict with Canada is an upside risk for autos in particular.
Services less energy rose by 0.3%, and this is a clear disappointment being the strongest gain in three months. Shelter rose by 0.3% after two straight gains of 0.1% with lodging away from home up by 2.4% after declines of 2.8% in July and 2.4% in June. This bounce looks corrective. Owners’ equivalent rent rose by 0.2%, down from 0.3% in July. However, CPI ex food, energy and shelter rose by 0.31% which is the strongest since February, meaning the bounce in lodging away from home was not the only cause for the surprise.
Transportation services rise by 0.5% led by a 2.7% rise in air fares, and that looks like feed through from energy and is not a major surprise. Motor vehicle insurance, another frequent recent source of volatility, fell by 0.8%. Education and communication services saw a strong 1.8% increase led by a 5.4% surge in telephone services which looks like a one-time bounce and is probably the biggest surprise in the breakdown. The surge in telephone services added 0.096% to the core CPI.
The core CPI breakdown looks quite subdued outside the modest numbers of components outlined above and is probably not going to be seen as a clear game changer at the Fed. However the data is strong enough to mean that a lack of tightening would strain Fed credibility, particularly given a strong payroll, a quite firm PPI and renewed gains in the oil price.
Yr/yr growth remained stable overall at 3.4% while the ex food and energy yr/yr pace slowed to 2.4% from 2.5%, and that is the lowest since March 2021. Before rounding the slowing in the yr/yr core rate was marginal, to 2.446% from 2.478%. A September tightening looks justified, but if the core rate continues to ease, further tightening may still be avoided.
