US Inflation Halts As Prices Slowly Rise In August

WASHINGTON, Sept.14 (Reuters) – Underlying U.S. consumer prices rose at their slowest pace in six months in August as used motor vehicle prices fell, suggesting that the Inflation was likely to have peaked, although it could remain high for some time against a background of persistent supply constraints.

The broad easing in price pressures reported by the Labor Department on Tuesday aligns with Federal Reserve Chairman Jerome Powell’s long-held belief that high inflation is transitory. Still, economists have warned it is too early to cheer and expected the US central bank to present plans in November to start cutting its massive monthly bond-buying program.

“Inflation remains troublingly strong, even if it doesn’t explode like it did earlier this year,” said James McCann, deputy chief economist at Aberdeen Standard Investments in Boston. “If we continue to see further declines in inflation over the next six months, that should ease the pressure on the Fed to quickly follow the cut in interest rates.”

The consumer price index excluding the volatile components of food and energy edged up 0.1% last month. This was the smallest gain since February and followed a 0.3% increase in July.

The core CPI was held back by a 1.5% drop in prices for used cars and trucks, which ended five consecutive monthly increases. The sharp increases in the prices of used cars and trucks, as well as services in the sectors most affected by the COVID-19 pandemic, were the main drivers of the rise in inflation at the start of the year.

Air fares fell 9.1% in August, likely because a resurgence in infections, driven by the Delta variant of the coronavirus, squeezed demand for air travel. Motor vehicle rentals and insurance also declined.

In the 12 months to August, the core CPI rose 4.0% after advancing 4.3% in the 12 months to July. Economists polled by Reuters had forecast the core CPI to gain 0.3% for the month and rise 4.2% year-on-year.

Wall Street stocks were trading lower. The dollar (.DXY) fell against a basket of currencies. US Treasury prices have gone up.

SUPPLY CONSTRAINTS REMAIN

In addition to the surge in used car and truck prices that appears to have run its course, hotel and motel prices are now above pre-pandemic levels, suggesting moderate gains to come. Prices for accommodation in hotels and motels fell 3.3% after rising 6.8% in July. Part of the drop in prices was likely due to the surge in coronavirus infections.

But bottlenecks persist in the supply chain and the labor market is tightening, pushing up wages. There was a record 10.9 million job vacancies at the end of July, forcing companies to raise wages as they vie for workers.

Amazon.com (AMZN.O) on Tuesday raised its average starting wage to $ 18 an hour. Read more

Housing shortage leads to record hikes in house prices and rents soar as COVID-19 vaccinations allow businesses to recall workers to offices, driving Americans back to cities following fueled exodus by a pandemic to areas of lower density. These factors could help keep annual inflation higher.

Principal residence owners’ equivalent rent, which is what a landlord would receive by renting a home, rose 0.3% in August, increasing by the same margin for the fourth consecutive month.

“The biggest upside risk to inflation over the next six months comes from the potential pass-through of rising house prices to the shelter component of the CPI,” said Bill Adams, senior economist at PNC Financial in Pittsburgh, Pennsylvania.

Furniture and bedding prices rebounded 2.3%, while home appliances accelerated 1.5%, underlining supply chain constraints. Prices for new motor vehicles rose 1.2%, marking the fourth consecutive month of gains above 1%. A global semiconductor shortage, exacerbated by the spread of the Delta variant in East Asia, has forced automakers to cut production.

Consumers also paid more for clothes. The cost of health care rose at a moderate pace of 0.2%, as steep increases in prices for hospital services were offset by a drop in prescription drugs. The cost of doctor’s visits remained unchanged.

The government announced last week that producer prices rose sharply in August, with the PPI posting its biggest annual increase in nearly 11 years. Read more

Some economists expect Fed officials to improve their inflation estimates when the U.S. central bank releases its summary of economic projections at the end of the September 21-22 policy meeting. The Fed’s preferred inflation measure for its flexible 2% target, the basic personal consumption expenditure price index, rose 3.6% in the 12 months to July, matching the gain of June. Data for August will be released later this month.

The headline CPI rose 0.3% in August, the smallest increase since January, after advancing 0.5% in July. The food price index rose 0.4%, slowing after two consecutive months of strong gains as the cost of dairy products declined.

Prices for food outside the house have also been moderate. Gasoline prices rose 2.8% after increasing 2.4% in July.

In the 12 months ending in August, the CPI rose 5.3% after rising 5.4% year-on-year in July.

“Even with a slowdown in monthly CPI gains, strong year-over-year increases will persist until 2022,” said Chris Low, chief economist at FHN Financial in New York City.

“The slowdown in sectors sensitive to reopening is further evidence of the transitory history of inflation, but steady increases elsewhere show that inflation is likely to stay even after these sectors adjust.”

Reporting by Lucia Mutikani, edited by Chizu Nomiyama, Paul Simao and Andrea Ricci

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