September 16, 2019 — Inflation Starts to Move


US consumer prices rose in August by 0.3 percent for the third straight month.  But it unlikely it will deter the Fed from cutting interest rates this week.  The Fed’s accommodation is being dictated by weakening growth prospects, not inflation.

Core inflation, excluding energy and food, increased 2.4 percent for the last 12-months, the most since July 2018, after being up 2.2 percent in July.  The core CPI has not produced two consecutive monthly gains of 0.3 percent since the first quarter of 2001 until now.  Inflation could build modestly for the second half of the year, if the trend continues.  The Fed has a 2 percent inflation target for the core personal consumption expenditures (PCE) price index which is up 1.6 percent for the year in July.  Economists are expecting inflation to accelerate over the next few months as tariffs are applied to imported goods from China, but the trade dispute will drag on the economy.

Financial markets have fully priced in a .25% rate cut at the Fed’s upcoming policy meeting September 17-18, and expect further easing in October and December. Fed Chair Powell has said the bank will continue to act “as appropriate” to keep the expansion on track.