The consumer price index (CPI) increased by 0.4 percent in August, modestly above expectations for a 0.3 percent uptick. Energy prices rose 2.8 percent during the month, while food prices were virtually unchanged, edging higher by just 0.1 percent. Excluding those categories, core CPI rose by 0.2 percent for the month, in line with expectations.
Over the past year, headline inflation increased by 1.9 percent, with rising energy costs playing a substantial role. A year ago, inflation was running at close to 1 percent, with the lingering effects of the collapse in oil prices still dragging down the index. With oil finding a floor and edging higher, the broad measure of consumer prices also stabilized and moved closer to the Fed’s 2.0 percent target.
While the outsized increase in energy prices in August may reflect some of the impact of Hurricane Harvey temporarily disrupting production along the gulf coast, it also came on the heels of three consecutive months of decline. It will take some time for conditions in the impacted area to return to normal, but the disruption – and resulting price increases – should prove temporary and filter through the index results over the next few months.
From a bigger picture perspective, inflation remains relatively subdued, with both core and headline measures hovering below 2.0 percent. Tightening labor market conditions and continued economic growth have been expected to put more upward pressure on inflation, but to this point, results have fallen short. Even with labor markets at or near theoretical “full employment”, core inflation has fallen by over 0.5 percent over the past year.
The Fed appears committed to continuing down the path of gradual policy normalization via measured increases in the policy rate, with expectations that the central bank will formally announce plans to begin the process of reducing its balance sheet as soon as next week.
The question that the Fed may encounter is whether further tightening is needed with inflation showing little sign of accelerating, let alone surpassing their target rate. The risk is that policymakers move too aggressively and cool the economy in an effort to address potential inflation that doesn’t materialize. Policymakers are undoubtedly weighing that risk, but balancing it with the need to normalize policy and accumulate some dry powder to deploy in the next downturn, whenever it ultimately arrives.
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