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First Cut: August CPI points to tame inflation conditions as commodities remain soft and services gain steadily

The Consumer Price Index edged up 0.1% in August from July, a minimal month-over-month increase that reflected flat prices for food and beverages, a 1.9% dip in energy costs, a 0.2% increase in shelter prices, motor vehicle prices up 0.3%, medicate care up 0.9%, health insurance up 1.9%, and tobacco and smoking products up 0.5%. The core CPI was up 0.3%. The CPI excluding shelter only – which accounts for about a third of the basket of goods – was unchanged from the prior month.

The month-over-month change was as expected, mainly on expectations of a sharp decline in gasoline prices which fell 3.5%.

Compared to a year ago, the CPI was up 1.7% overall but up 2.4% excluding food and energy. The CPI excluding only shelter was up 1.0% from August 2018, while excluding food, energy, and shelter was up 1.7%.

Where commodities prices continue to contribute little or nothing to upward price pressures, services are steadily on the rise. In August commodities prices were down 0.3% from the prior month and up a scant 0.2% compared to the year-ago month. Services costs were on trend with a 0.2% increase from July, while up 2.7% from August 2018. Prices for medical care and health insurance remain large sources of upward moves for services prices.

While the PCE deflator is the FOMC’s preferred measure of inflation, the CPI is the most prominent inflation data the Committee will have in hand at the time of the September 18-19 meeting. The PCE deflator will not be reported until Friday, September 27 at 8:30 ET. The CPI numbers suggest that while overall prices are fluctuating on energy costs – a common source of transitory influence on broader prices – the underlying core trends is running above the Fed’s 2% symmetric objective. The FOMC will not mind a little hint of inflation picking up after some recent softening. In combination with the labor market data, it should indicate that monetary policy is achieving the dual mandate. However, the FOMC will also have a number of risks to the outlook to contend with that will be the determining factor as to whether another rate cut is imposed as is widely anticipated.

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