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September 12, 2019 Blog 1 min read
Today’s inflation report illustrates the current “tale of two economies”, in which the price of goods remains in check, but the costs of a variety services are rising at a faster pace.

August 2019 CPI Chart

The consumer price index (CPI) increased by a modest 0.1% in August from the month prior, in line with economists’ expectations. Falling energy and flat food costs masked the continued upward pressure in service-related costs. Excluding food and energy, core CPI increased by 0.3% in August, faster than expectations for a 0.2% increase.

Over the past year, headline CPI increased 1.7% while the core reading rose by 2.4%. The report illustrates the bifurcation that exists in the economy. Despite the disruptive effects and direct costs of tariffs and disruptions to global trade, the price of a wide range of goods have remained relatively flat. From new cars to clothing, prices have barely budged in the past year.

The same cannot be said for the service sector, where tight labor markets and robust demand have been driving accelerating price increases. Housing and medical care services rose by 3.4% and 4.3% respectively over the past year, and core inflation increased for the third consecutive month.

Other economic data released this morning was unambiguously positive, as the department of labor’s weekly report on jobless claims reinforced the health of the labor market. Initial claims dropped sharply to 204,000 for the week ended September 7 – very near a half-century low.

Where does this leave the Fed? The markets are widely expecting another quarter-point cut from the central bank next week, and it seems highly unlikely that policymakers will disappoint.

We would expect the Fed to point to the strength of the labor market, while acknowledging the slowdown in job creation. Falling headline inflation shouldn’t be ignored, but the degree to which energy prices are offsetting accelerating costs elsewhere shouldn’t be overlooked. All of this takes place against a global economic backdrop in which risks are rising, and the potential for a downside surprise appears greater than the potential for unexpected strength.

The bottom line remains that while the economy is slowing, and risks have risen. Even so, the strength of the consumer sector, the resiliency of labor markets, and the pivot by the Fed toward lower rates should all help to cushion the economy against those risks.

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