• Core CPI inflation rose 2.4% year-over-year in August
  • The headline index increased 1.7% year-over-year
  • Core prices rose 0.3% month-over-month for a third straight month

There is still little if any evidence that US inflation is at risk of coming unhinged on the upside. Nonetheless, the third straight 0.3% increase in price growth excluding food & energy products marks the longest such stretch since 1995 – and the year-over-year rate at 2.4% matches a cycle high. US tariffs on a widening variety of goods imports from China may be filtering through to higher consumer prices, but do not explain all of the increase. Prices for services ex-energy products also increased 0.3% in each of the last three months. The US Fed pays more attention to the core PCE deflator, which has held under a 2% rate, but could presumably follow CPI prices higher in the near-term.

Of course, the Fed has been less concerned about current inflation pressures than the risk that an escalating trade war and slower global growth will weigh on US growth, and ultimately inflation, going forward. But underlying inflation pressures edging up towards, if not even a little beyond, the Fed’s 2% target rate also should reinforce the view of most Fed policymakers that what is needed in terms of interest rate policy currently is a pre-emptive ‘mid-cycle-adjustment’ to rates rather than the beginning of a longer deeper rate cutting cycle. We continue to pencil in another two 25 basis point rate cuts from the Fed this year, the next being next week in September.


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