US: Stagflation nation?

US core (ex-food and energy) consumer price inflation for August has posted the third consecutive 0.3%MoM reading, above the 0.2% figure expected by the market. This has pushed the annual rate up to 2.4%YoY, the highest reading since September 2008 while the 3-month annualised rate is now running at 3.4%. Given the recent acceleration in average hourly wage growth – currently running at a 4.2% annualised rate – the US economy is experiencing its biggest pick-up in inflation pressures since before the global financial crisis.

In terms of today’s CPI report the details show that medical care costs, tobacco and housing costs (through the owner equivalent rent component) are responsible for most of the acceleration, but there have also been some big swings in apparel prices. However, food price inflation is modest, posting three consecutive flat monthly readings while the hefty falls in fuel prices have dragged the energy component lower. As such headline monthly inflation figure came in at 0.1%MoM or 1.7%YoY.

Looking ahead there is the potential for the latest round of tariff hikes, which tended to be focused on consumer goods, to be passed on in prices. This means core inflation is likely to remain elevated and therefore consistent with the Fed’s mandate. On the face of it, this has the potential to limit the scope of additional Federal Reserve rate cuts.