On Wednesday the BLS released the latest US inflation data and top line, it appears the post-pandemic spike in U.S. inflation eased further last month as year-over-year price increases reached a three-year low. However, while the spike in goods, food and energy prices is over, services inflation remains uncomfortably high.
Core prices rose 3.2% in August from a year ago, the same as in July. And on a month-to-month basis, core prices rose 0.3%, a slight pickup from July’s 0.2% increase. Core of course is closely watched by economists as it typically provides a better read of future inflation trends.
But it is important to look at the elements which flowed into the headline cpi. For example, a key reason for last month’s drop in overall inflation was the third drop in gas prices in the past four months: Average gas prices fell 0.6% from July to August and are down 10.6% from a year ago.
Importantly, the tick-up in core inflation from July to August reflected an acceleration in housing costs and some spikes in the prices of air fares and hotel rooms. Shelter highlights another serious issue — the high level of “sticky” inflation for services and commodities whose prices take a long time to change. Including shelter, this measure, calculated by the Atlanta Fed, remains above 4%. If shelter is ignored, it’s below 3%, making it far easier for the Fed to start easing!
But the big question now is whether we are in a pre-recession period in the US. Markets continue to expect big cuts ahead and bond yields are responding accordingly.
For Australia, where inflation is higher, and rates are unlikely to change this year from the current 4.35%, the economy will be buffeted by weaker demand from China, and rate cuts in other places. Which once again highlights the dilemma we are in thanks to poor monetary and fiscal policy in recent times. And again, the neutral rate does appear to be higher now, so we should not expect rates to miraculously slide towards zero. We are now in a higher rate for ever environment.
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