August CPI and policy implications

The August CPI surprised on the upside as Fed policy expectations seesaw between yesterday’s soft retail sales data and today’s surge in medical inflation.  Strength in the latest report was not limited to medical care: shelter continued to approach April 2007 levels, goods inflation appeared to have stabilized, and energy cost had yet factored in renewed decline in oil prices in September.  Investors will look ahead to the upcoming PCE data with a larger weigh in medical care.  Additionally, logistic distortion to goods inflation related to the Hanjin bankruptcy will likely manifest in the coming months.

Overall, the report has a low probability of tilting the balance on near-term policies.  Weaker consumer spending data would support dovish policymakers’ call for caution but unable to diminish Committee participants’ apt focus on “big numbers” (labor market indicators and inflation), while the latest inflation data would largely affirm Yellen’s assessment that “in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”

Data breakdown

August CPI, month-over-month changes:

• All items at 0.199% MoM vs. 0.1% survey and -0.041% prior
• Core CPI at 0.252% MoM vs. 0.2% survey and 0.088% prior
• OER (shelter) at 0.284% MoM vs. 0.290% prior
• Medical care at 0.974% MoM vs. 0.523% prior
• Apparel at 0.190% MoM vs. 0.023% prior
• New vehicles at 0.020% MoM vs. 0.244% prior
• Energy at -1.233% MoM vs. -2.047% prior

August CPI, year-over-year changes:

• All items at 1.095% YoY vs. 1.000% survey and 0.881% prior
• Core CPI at 2.301% YoY vs. 2.2% consensus and 2.165% prior
• OER (shelter) at 3.309% YoY vs. 3.261% prior
• Medical care at 4.920% YoY vs. 3.988% prior
• Apparel at 0.197% YoY vs. 0.245 prior
• New vehicles at 0.007% YoY vs. -0.024% prior
• Energy at -9.249% YoY vs. -10.876% prior