US CPI inflation falls modestly

The US Bureau of Labor Statistics announced on September 13 that consumer price index (CPI) inflation was 8.3% in August, down from 8.5% in July. This is the second consecutive drop in year-on-year CPI inflation in the US, but the figure was higher than some forecasts.

The core CPI reading, subtracting food and energy prices, rose to 6.3% in August, an increase from 5.9% in July.

The BLS reported a slight increase in month-on-month inflation of 0.1%, after reporting no inflation between June and July.

The bureau reported further increases in food, housing and medical costs, but said these were all outweighed by a 10.6% month-on-month decrease in gasoline prices. Energy prices fell by 5%.

Food prices rose 0.8% month on month, while shelter rose 0.7%.

Analysts had expected inflation to be 8.1%, with a slight month-on-month decline. The Dow Jones futures index fell more than 400 points after the BLS released its findings.

On September 12, one day before the BLS release, the Federal Reserve Bank of New York published results from its August 2022 Survey of Consumer Expectations. Their findings showed “steep declines” in inflation expectations at the one-, three- and five-year horizons.

The median respondent in the survey expects inflation will be 5.7% a year from now, down from 6.2% in July. At the three-year horizon, the median participant forecasts 2.8% inflation, down from 3.2%. The median home price expectation fell to 2.1%, its lowest reading in more than two years.

On a less optimistic note, survey participants reported more difficulties obtaining credit, and 12.2% expressed concerns about being unable to fulfil a minimum debt payment. The latter was the highest figure since May 2020.

The Federal Open Market Committee favours the personal consumption expenditure index to measure inflation for monetary policy-making. The Bureau of Economic Analysis compiles this index, and the Federal Reserve Bank of Dallas calculates its own, trimmed version.

The BEA reported PCE inflation was 6.3% in July, down from 6.8% in June. The agency will release its August reading on September 30.

BLS figures published on September 2 showed that US unemployment rose slightly in August. Despite the creation of 315,000 new non-farm jobs, the rate rose to 3.7%, up from 3.5% in July.

Dean Baker, senior economist at the Center for Economic Policy Research in Washington, DC, said that core inflation was above prior forecasts. “Looks like we will have to wait to see when we can say inflation has peaked,” he added.

Brian Coulton, chief economist at ratings agency Fitch, said: “We don’t really see anything in here that would make the Fed want to opt for a slower pace of rate hikes this month.” He noted that core inflation had increased and predicted that it would not return to the FOMC’s 2% target “until after 2023”.

Coulton added that the FOMC would have to increase the fed funds rate to “at least” 3.5% to 4%, well above a neutral rate he put at 2.5%.

In a September 13 opinion piece in The Guardian, Nobel economics laureate Joseph Stiglitz urged the FOMC to pause rate increases. In an article co-authored with Baker, the economists argued that inflation was falling mainly due to changes on the supply side, which are less impacted by monetary policy.

In a recent interview with Central Banking, Stiglitz said rate hikes could even worsen supply constraints, by raising the costs of investing in additional capacity.

“If you kill the economy, it does tend to tame prices,” he said. “So, you could cause a depression, and I agree a depression will tame inflation. But that’s not what we want.”