August’s CPI Research Notes

by Jim Baird on September 17, 2013

CaptureInflation pressures remain subdued

Headline CPI rose again in August by a modest 0.1%, as the actual increase was more tame than anticipated. The one-year change in CPI slipped to just 1.5% in August, a sharp decline from the July print of 2.0%.

Core inflation remained fairly steady, also rising by just 0.1%, although the year-over-year change in core CPI edged fractionally higher to 1.8% in August. That being said, despite their volatility, the energy component of the index is virtually unchanged from one year ago, actually dropping 0.1% during that period.

The big picture of inflation hasn’t changed meaningfully this year. Headline inflation has remained in a relatively narrow range between 1 and 2%. Likewise, core inflation has been entrenched in a comparable range. Price growth remains subdued as excessive slack remains in the labor market and the economy fails to gather sufficient momentum to push wages and prices for goods meaningfully higher.

In the near term, catalysts for a sharp uptick in inflation still appear to be limited, unless the economy can break out of the current trend and provide the type of robust growth which we’ve experienced during past recoveries. That outcome also appears unlikely.

The trend in inflation has now generally been downward since late 2011, despite the Fed’s best efforts to bolster the economy and bring inflation in line with the central bank’s 2% target. Despite subdued inflationary pressures in the near term, the risk of higher inflation down the road still exists.

The Fed is in an interesting position as they debate the near-term direction of monetary policy. Inflation remains in check, with some measures actually declining in recent months. The jobs market continues to grow, but at a pace that is less than ideal. Nonetheless, all indications are that the Fed is poised to announce tomorrow that they will begin to pare back their bond purchases. Whether that comes to fruition as expected – and perhaps more importantly, whether they are able to fully execute their plan over the next few quarters – remains an unanswerable question. Should the economy once again fail to find its next gear and accelerate from its modest pace of growth, the Fed may be hard-pressed to fully remove its support.

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Why Taper? Inflation is Benigh (WSJ)

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