• The all items index rose 0.4% in August, slightly ahead of market expectations. That pushed the year-over-year rate up to 1.9% from 1.7% in July.
  • A 6.3% jump in gasoline prices was partly responsible for the headline increase.
  • It is likely a bit too soon to attribute rising gasoline prices to Hurricane Harvey-related supply disruptions. That will be a larger factor in September’s CPI reading.
  • Consumer prices excluding food and energy rose 0.2%, breaking an unusually long five-month stretch of more modest increases. However, the year-over-year rate of core inflation was unchanged at 1.7% for a fourth consecutive month.
  • The shelter index was a big contributor to rising services prices. A 0.5% increase in that component was the largest monthly gain in more than a decade.

Our Take:

August’s CPI report provided more of the same: steady core inflation alongside an energy-driven move in the headline rate. As the BLS noted, core inflation has been in a 1.6-2.3% range for six years now. Although some transitory factors are responsible for keeping the current rate at the lower end of that range, it is hard to argue we are seeing much in the way of inflationary pressure. Our diffusion index shows only 30% of CPI basket components are rising at or above a 2% year-over-year rate. That is despite clear signs of limited economic slack, including an unemployment rate that is 1/4 percentage point below the Fed’s longer run estimate.

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Today’s inflation readings don’t alter our expectations for next week’s Fed meeting. We already saw little chance of a rate hike, with policymakers instead focusing on implementing their plan to start shrinking the Fed’s balance sheet. Our long-held view has been that December would be the timing of the next rate move although markets remain skeptical of even that. Given some FOMC members’ concerns about low inflation, we’ll likely need to see higher CPI readings in the coming months to raise the odds of one more rate hike this year.


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