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US CPI Weak Around the Edges, but Solid at Core

Matt Eidinger September 12, 2019

While headline consumer inflation in the US was contained in August, core consumer inflation in the US surpassed consensus expectations on both an annualized and a monthly basis – with the yearly measure and hitting the highest level in well over a year.

Although the Fed prefers the Personal Consumption Expenditures Index (PCE) as an inflation measure and is unlikely to be swayed significantly by today’s CPI data at its policy meeting next week, it clearly indicates American consumer spending remains strong despite the ongoing trade war rhetoric and apparent manufacturing slowdown.

Data from the US Bureau of Labor Statistics indicated headline consumer inflation advanced at a rate of 0.1% last month and an annualized rate of 1.7%, slightly disappointing market expectations hoping for an extra tenth of a percentage point on an annualized basis.

Stripping out the volatile food and energy categories, core CPI rose 0.3% last month and an annualized rate of 2.4% – better than market expectations for a 2.4% increase. 

Beneath the headline figures, a notable decrease in the energy index (-1.9%) was apparent as a result of falling energy commodity prices (-3.3%). However, these losses were overshadowed by large gains in used vehicles (+1.1%) and medical care services (+0.9%) last month.

At the Department of Labor (DOL), seasonally adjusted initial jobless claims impressed market participants by falling to 204,000 during the week ending September 7, with notable decreases in claims coming from services industries in New York State. The four-week moving average moved down to 212,500.

Today’s data comes just 14 hours after US President Trump made a gesture of good will towards China, delaying a proposed increase of 5% on $250 billion worth of Chinese goods from October 1 to October 15.

The greenback rose slightly against the loonie in the minutes after the data hit the wire, trying to recoup some of last Friday’s large losses against the Canadian unit after Statistics Canada’s blowout jobs report.

The trade-weighted dollar index broke through 99 for the first time since September 2 and touched the highest levels since mid-2017. Fixed income markets are also echoing dollar supremacy this morning.

Although there is an overwhelming probability that the US Federal Reserve cuts rates by a quarter point at next week’s meeting, overnight indexed swap rates indicate there is now an 11.2% chance that interest rates remain will remain unchanged at 2% to 2.25%.

The strength of the US labor market cannot be questioned, as evidenced by this morning’s weekly jobless claims. While the US Federal Reserve will almost certainly decide to cut rates at next week’s FOMC meeting, it will go into its deliberations with some optimism concerning the American consumer.

 

Matthew Eidinger

Fintech Specialist, Dealing Operations

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