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US Inflation Makes a Modest Return

Posted by Joseph Trevisani on Sep 16, 2016 2:10:41 PM

Consumer inflation rose more than forecast in August pushed higher by racing health care and rental expenses, bringing the core annual rate back to its highest level in eight years.

Prices jumped 0.2 percent after being flat the previous month, according to Labor Department data in Washington on Friday.  Analysts had predicted a 0.1 percent gain.  The core rate, excluding food and energy items, added 0.3 percent in the month ahead of its 0.2 percent forecast, and following on July's 0.1 percent gain.  

The core yearly rate climbed to 2.3 percent in August as predicted, from 2.2 percent in July. This matched the rate in February and also that of January and April 2012 as the highest since the recession. 

Inflation, or its absence, has been one of the Federal Reserve’s main concerns. The bank's preferred measure, the core personal consumption price index (PCE) from the Commerce Department has not been at its 2 percent target since April 2012. This gauge was at 1.6 percent in July and has averaged 1.5 percent annually since the beginning of 2013.

The Fed will decide this week whether or not to hike the Fed Funds rate for only the second time in a decade. Most analysts expect no action, and credit markets list just a 20 percent chance of an increase despite recent assertions from Chair Janet Yellen and Vice-Chair Stanley Fischer, that the case for an increase has "strengthened" recently.  

Most of the inflationary pressure this year has come from medical expenses and the cost of rental housing. Aside from these categories consumer costs were little changed.

Prices for 'medical care commodities' rose 1.1 percent in August just ahead of those for medical services, which include doctor visits and health insurance. Health insurance premiums jumped 0.9 percent in August, the most since august 1990 and have been forced higher by the requirements of the government’s health care reform of 2010.  Prices for drugs, prescription and over-the-counter, rose 1.2 percent, the most in records going back to 2009. 

Housing costs rose 0.3 percent in August. Owners-equivalent rent, a grouping designed to track rental prices, also rose 0.3 percent.

Inflation has gradually moved higher this year after dropping dramatically in 2015 as energy prices have moderated after collapsing last year, dollar strength has ebbed and wage increases have showed signs of incipient acceleration.  

Energy and food expenses were largely unchanged in August, as were automobile prices. The price of clothing increase 0.2 percent. 

The overall CPI gauge over the last 12 months moved up to 1.1 percent in August from 0.8 percent in July.  It remains at about half of its 2.1 percent average from 2001 through 2014.  

This annual rate had fallen as far as -0.2 percent in April 2015, pummeled by the collapse in energy prices and averaged only 0.1 percent for the year, its lowest non-recessionary showing in 60 years.

A separate report from the Labor Department showed that inflation adjusted hourly earnings fell 0.1 percent in August and were just 1.3 percent higher on the year. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg





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