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US: Inflation Surprises to the Upside in August, Making a Clear Case for Another 75 bps Rate Hike    

  • Consumer price inflation increased by 0.1% month-on-month (m/m) in August, following July’s flat reading. On a year-over-year (y/y) basis, headline inflation decelerated by 0.2 percentage points (pp) from July, slowing to 8.3%.
  • Energy prices fell by 5.0% m/m, as gasoline prices declined by a meaningful -10.6% m/m, while energy services rose 2.1% m/m. Food prices decelerated to 0.8% m/m (following the 1.1% m/m gain in July), but are still up 11.4% y/y.
  • Core inflation (excludes volatile items such as food & energy) rose 0.6% m/m – a marked acceleration from July’s gain of 0.3% m/m. Relative to last August, core inflation sits at 6.3% – up 0.4pp from last month.
  • Price growth across core services (+0.6% m/m) accelerated from last month’s gain of 0.4% m/m. Shelter costs (+0.7% m/m) were again a meaningful contributor, with rent of primary residence (+0.7% m/m) and owner’s equivalent rent (+0.7% m/m) each notching similar gains. Prices paid for lodging away from home (0.1% m/m) were up modestly, after recording sizeable declines in each of the two months prior. Other categories including medical (0.8% m/m), transportation (0.5% m/m) and education & communication services (0.2% m/m) were also higher on the month. Price growth across recreational services was flat in August.
  • After showing recent signs of easing, core goods prices (0.5% m/m) accelerated in August. Gains were seen across household furnishings (+1.1% m/m), apparel (0.2% m/m), recreational (0.6% m/m), and transportation (0.4% m/m) goods. Price growth in transportation was entirely the result of new vehicle prices rising 0.8% m/m, while used prices fell a modest 0.1% m/m.

Key Implications

  • There’s no way around it, this was a disappointing reading on inflation. After showing some signs of easing in recent months, an acceleration in prices across most goods and services categories led to meaningful uptick in core inflation in August.
  • While price growth across services is likely to show more staying power, the recent acceleration in goods prices is not sustainable. Inventory-to-sales ratios across department stores, home furnishing, electronic & appliance stores and building materials, garden equipment & supply stores all currently sit well above their respective pre-pandemic levels. With the holiday season upon us, retailers are likely to start offering some discounts to lean out existing inventory.
  • We have heard from a number of FOMC officials over the past week, and it has been made clear that policymakers will need to see compelling evidence that inflation is slowing on a sustained basis before pivoting on its monetary policy stance. Today’s report offered no evidence that inflation is even moderating. This suggests that another 75 basis point hike is all but a sure thing when the FOMC meets later this month.
TD Bank Financial Group
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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