August 10, 2023 | 09:10
The Night They Drove Old CPI Down
U.S. inflation continued to cool in July, taking 'The Weight' off the Fed to hike rates in September. Consumer prices rose 0.2% for a second straight month, and are up just 1.9% annualized in the past three months--the slowest pace since June 2020. A tough year-ago comparison, however, saw the yearly rate turn up to 3.2%. Food costs remained on low simmer, up just 0.2% in the month. Gasoline prices rose a similar amount, though they have climbed further in August. Helping to hold down inflation were further declines in used vehicle prices (now down 5.6% y/y), a slight dip in new vehicle prices (which haven't risen in four months), another drop in medical care services costs (which will continue to October when the calculation for health insurance premiums flips sign), and another big slide in airfares (down 8.1% m/m). On the upside, the cost of repairing and insuring an automobile was jacked up further, up 1.0% m/m (12.7% y/y) and 2.0% (17.8%), respectively. As well, shelter costs rose 0.4% for a second straight month, though rent growth has been moderating.
The core CPI rose 0.16% for a second straight month, slashing its 3-month annualized rate to 3.1%, the lowest since September 2021. This also trimmed the yearly core rate to 4.7%, though the base effects turn friendlier for the next two months. The 'supercore' metric (services excluding energy and rents) picked up a bit to a 0.2% monthly rate after a flat June, nudging the yearly rate up to 4.1%. But the 1.7% 3-month annualized rate will help soothe Powell's inflation angst.
Bottom Line: While two months of subdued core (and supercore) inflation numbers might not define a trend, they do indicate progress in the Fed's fight to restore price stability. Barring a hot August CPI and labour market report, the progress should encourage the FOMC to skip a rate hike on September 20 and, in our view, for the remainder of this exceptional tightening cycle. That can only increase the prospect for a soft landing.