U.S. Consumer Price Index (August 2023)

Despite the upside surprise, core inflation continues to trend favorably

• The Consumer Price Index (CPI) rose 0.6% month-on-month (m/m) in August, in line with the consensus forecast. On a 12-month basis, CPI inched 0.4 percentage points (pp) higher to 3.7% . 
  • Energy prices (+5.6% m/m) were a big factor driving last month's acceleration, with prices rising at its fastest pace since June 2022. Meanwhile, food prices (0.2% m/m) matched last month's gain, as some deceleration in food at home (+0.2% from 0.3%) were offset my stronger gains in prices for food away from home (+0.3% from 0.2%).
• Excluding the direct effects of food & energy, core inflation rose a 0.3% m/m – accelerating from June and July's monthly gains of 0.2% m/m and coming in a tenth of point above the consensus forecast. The 12-month change on core continued to edge lower, falling 0.3pp to 4.4%, while the three-month annualized change slipped to 2.4%. 
• Price growth across services rose 0.4% m/m, matching last month's gain, and remain at an elevated 5.9% year-over-year. 
  • Shelter costs remained a key source of inflationary pressure, with rent of primary residence (+0.5% m/m from 0.4% m/m) accelerating last month, while owners' equivalent rent (+0.4% m/m) matched July's gain. 
  • Price growth across non-housing services accelerated to 0.4% m/m in August – the strongest monthly gain in five months. Its twelve-month change remains at an elevated 4%. 
• Core goods prices declined by a very modest 0.1% m/m, with most of the pullback attributed to another sizeable decline in used vehicle prices (-1.2% m/m). 

Key Implications

• After two months of softer prints, core inflation surprised to the upside in August, highlighting what we have been saying for some time that progress is unlikely to come in a linear fashion. That said, even after accounting for the stronger monthly gain, the three-month annualized change on core still slipped to 2.4% – the slowest pace of growth since March 2021.  
• With core inflation continuing to move in the right direction, the labor market slowly coming back into better balance, and term yields having recently surpassed last year's highs, the FOMC can afford to skip the September meeting and continue to 'monitor the data'. However, it's still too soon to know whether the recent easing in inflationary pressures will be fleeting or more long lasting. This should keep the Fed guarded at its upcoming meeting, reinforcing the need for rates to remain 'higher for longer' and keeping the possibility of another rate hike in play, should progress on either the inflation or labor market stall in the months ahead. 

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