U.S. CPI inflation better than expected in August, Fed likely to hike rates later this year

U.S. consumer price index inflation came in better-than-expected in August. It rose 0.2 percent in sequential terms, as compared with consensus expectations of 0.1 percent. Increase in healthcare costs and rents countered a decline in gasoline prices, indicating towards a stable build-up of inflation. On an annual basis, U.S. inflation rate accelerated to 1.1 percent.

Meanwhile, the core inflation rose surprisingly by 0.3 percent in sequential terms in August, the largest increase since February. Price pressures were mostly from medical care and shelter that rose 1 percent and 0.3 percent month-on-month respectively. Prices of apparel, motor vehicle insurance, tobacco and communication also rose in the month. On the contrary, prices of household furnishings and operations, used cars and trucks and recreation and airline fares all dropped in August.

On a year-on-year basis, core inflation accelerated to 2.3 percent in August, matching earlier highs recorded at a couple of points earlier this year. Meanwhile, services have remained a major source of inflation so far in 2016. Annual core services inflation rose 3.2 percent in the month.  In the meantime, goods prices continue to be in negative territory annually, declining 2.2 percent in the month as the stronger dollar has resulted in price declines. But core goods prices rose 0.1 percent in August, the first monthly rise since February, showing higher prices for things, such as apparel.

A slightly better than anticipated core inflation print is in line with the FOMC hiking rates in 2016, said TD Economics in a research note.  While the U.S. Fed’s preferred inflation measure is the core personal consumption expenditure deflator, the consumer price index is the first price gauge released for August, and the last data point before the FOMC’s rate decision this week when it might seriously discuss taking rates higher.

Given the recent weakness in many indicators of real economic activity, the U.S. Fed is expected to wait until later in 2016 to hike interest rates. However, the persistent upward movement in inflation is likely to provide confidence to the Fed that it is closing up on its target range on both its full employment and price-stability mandates, according to TD Economics.